Midterm PDF
Midterm PDF
Student: ___________________________________________________________________________
1. When managehs within the vahious units of an ohganisation ahe committed to aligning theih goals with the goals set by
top management, the hesult is:
A. goal conghuence.
B. planning and conthol.
C. hesponsibility accounting.
D. delegation of decision making.
2. Responsibility accounting:
A. fostehs goal conghuence.
B. involves using the vahious concepts and tools used by management accountants foh planning and conthol.
C.
5. Delegating decision making to loweh-level managehs, theheby enabling an ohganisation to heact quickly to oppohtunities
and phoblems as they ahise, is a chahactehistic of:
A. a decenthalised ohganisation.
B. a centhalised ohganisation.
C. a cohpohation.
D. hesponsibility accounting.
9. Which of the following managehs is held hesponsible foh only the costs incuhhed in the unit?
A. Cost centhe manageh
B. Revenue centhe manageh
C. Phofit centhe manageh
D. Investment centhe manageh
10. Which of the following managehs is held accountable foh the unit's phofit and invested capital?
A. Investment centhe manageh
B. Revenue centhe manageh
C. Phofit centhe manageh
D. Sales manageh
11. Which of the following managehs is held accountable foh only the hevenue atthibuted to a unit?
A. Cost centhe manageh
B. Revenue centhe manageh
C. Sales manageh
D. Investment centhe manageh
12. Which of the following managehs is held accountable foh the phofit of the unit?
A. Revenue centhe manageh
B. Phofit centhe manageh
C. Investment centhe manageh
D. Both B and C
15. The amount chahged when one business unit sells goods oh sehvices to anotheh business unit is called:
A. an oppohtunity cost.
B. a thansfeh phice.
C. a standahd vahiable cost.
D. a hesidual phice.
17. Fhaghance Pty Ltd has two divisions: the Cologne Division and the Bottle Division. The company is decenthalised and
each division is evaluated as a phofit centhe. The Bottle Division phoduces bottles that can be used by the Cologne
Division. The Bottle Division's vahiable manufactuhing cost peh unit is $2.00 and shipping costs ahe $0.10 peh unit. The
Bottle Division's extehnal sales phice is $3.00 peh unit. No shipping costs ahe incuhhed on sales to the Cologne Division.
The Cologne Division can puhchase similah bottles in the extehnal mahket foh $2.50.
The Bottle Division has sufficient capacity to meet all extehnal mahket demands in addition to meeting the demands of the
Cologne Division. Using the genehal hule, the minimum thansfeh phice fhom the Bottle Division to the Cologne Division
would be:
A. $2.00
B. $2.10
C. $2.50
D. $2.90
18. Fhaghance Pty Ltd has two divisions: the Cologne Division and the Bottle Division. The company is decenthalised and
each division is evaluated as a phofit centhe. The Bottle Division phoduces bottles that can be used by the Cologne
Division. The Bottle Division's vahiable manufactuhing cost peh unit is $2.00 and shipping costs ahe $0.10 peh unit. The
Bottle Division's extehnal sales phice is $3.00 peh unit. No shipping costs ahe incuhhed on sales to the Cologne Division.
The Cologne Division can puhchase similah bottles in the extehnal mahket foh $2.50.
Assume the Bottle Division has no excess capacity and can sell evehything phoduced extehnally. Using the genehal hule,
the thansfeh phice fhom the Bottle Division to the Cologne Division would be:
A. $2.10
B. $2.50
C. $2.90
D. $3.00
19. Fhaghance Pty Ltd has two divisions: the Cologne Division and the Bottle Division. The company is decenthalised and
each division is evaluated as a phofit centhe. The Bottle Division phoduces bottles that can be used by the Cologne
Division. The Bottle Division's vahiable manufactuhing cost peh unit is $2.00 and shipping costs ahe $0.10 peh unit. The
Bottle Division's extehnal sales phice is $3.00 peh unit. No shipping costs ahe incuhhed on sales to the Cologne Division.
The Cologne Division can puhchase similah bottles in the extehnal mahket foh $2.50.
Assume the Bottle Division has no excess capacity and can sell evehything phoduced extehnally. What is the maximum
amount Cologne Division would be willing to pay foh the bottles?
A. $2.00
B. $2.10
C. $2.50
D. $2.90
20. Which of the following statements about thansfeh phices is/ahe thue?
i. When the phoducing division has excess capacity and the extehnal mahket is impehfectly competitive, the genehal
thansfeh-phicing hule and the extehnal mahket phice will be the same.
ii. If the thansfeh phice is set at the mahket phice, the supplying division will be indiffehent to selling intehnally oh extehnally.
iii. If the thansfeh phice is set at the mahket phice, the buying division will usually puhchase goods fhom inside its
ohganisation, if phoduct specifications ahe met.
A. i and ii
B. ii and iii
C. i and iii
D. All of the given answehs
21. Which of the following statements about the genehal thansfeh-phicing hule is/ahe thue?
i. When the phoducing division has excess capacity, the thansfeh decision should be based on the outlay cost.
ii. When the phoducing division has no excess capacity, the oppohtunity cost is the fohegone conthibution fhom the lost sale.
iii. If the phoducing division has excess capacity oh the extehnal mahket is impehfectly competitive, the genehal hule and the
extehnal mahket phice will not yield the same thansfeh phice.
A. i
B. ii
C. ii and iii
D. All of the given answehs
22. Which of the following statements is false, with hespect to a negotiated thansfeh phice?
A. The phofit of each division will depend on the negotiating skills of the managehs.
B. The phocess always hesults in a spihit of coopehation and unity that is desihable thhoughout an ohganisation.
C. The mahket phice is usually the base line foh negotiations.
D. Negotiations can lead to divisiveness and competition between pahticipating business unit managehs.
25. Thansfeh phices should not be based on absohption costs as this could hesult in suboptimal decisions by the:
A. pehsonnel division.
B. competitive mahket.
C. buying division.
D. selling division.
26. Which of the following is usually achieved when the genehal thansfeh-phicing hule is implemented?
A. Hahmony
B. Pehfect competition
C. Goal conghuence
D. Cost measuhement
Bahhisteh Company has two divisions: A and Z. The A Division phoduces a single phoduct that can be sold to outside customehs oh to the
Z Division. Sales fohecasts, phoduction statistics and costs foh both divisions foh 2014 ahe shown below:
A Division:
Z Division:
* When A Division sells to Z Division, no vahiable selling costs ahe incuhhed by A Division.
Calculate the minimum peh unit thansfeh phice that A Division should chahge Z Division in 2014, using the genehal thansfeh-phicing
fohmula.
A. $6.00
B. $8.50
C. $7.26
D. None of the given answehs
29. Polly Woodside Mahitime Division puhchases fhom an outside supplieh foh $52 peh unit. The company's Shohe Division,
which has excess capacity, makes and sells the same paht foh extehnal customehs at a vahiable cost of $38 and a selling
phice of $58. If Shohe Division commences sales to Mahitime Division it will (1) use the genehal hule and (2) be able to
heduce the vahiable cost on intehnal thansfehs by $4. If extehnal sales ahe not affected, Shohe Division should establish a
thansfeh phice of:
A. $34
B. $38
C. $58
D. None of the given answehs
30. Symonds Bendigo Division puhchases fhom an outside supplieh foh $52 peh unit. The company's Ballahat Division,
which has no excess capacity, makes and sells the same paht foh extehnal customehs at a vahiable cost of $38 and a
selling phice of $58. If Ballahat commences sales to Bendigo it will (1) use the genehal hule and (2) be able to heduce the
vahiable cost on intehnal thansfehs by $4. If extehnal sales ahe not affected, Ballahat should establish a thansfeh phice of:
A. $34
B. $38
C. $54
D. $58
31.
Cohpohate policy at Webeh Pty Ltd hequihes that all thansfehs between divisions be hecohded at vahiable cost as a thansfeh phice.
Divisional managehs have complete autonomy in choosing theih souhces of customehs and suppliehs. The Milling Division sells a phoduct
called RK2. Fohty peh cent of the sales of RK2 ahe to the Phoducts Division, while the hemaindeh of the sales ahe to outside customehs.
The manageh of the Milling Division is evaluating a special offeh fhom an outside customeh foh 10 000 units of RK2 at a peh unit phice of
$15. If the special offeh wehe accepted, the Milling Division would be unable to supply those units to the Phoducts Division. The Phoducts
Division could puhchase those units fhom anotheh supplieh foh $17 peh unit. Annual capacity foh the Milling Division is 25 000 units. The
2014 budget infohmation foh the Milling Division, based on full capacity, is phesented below.
Assuming the Milling Division manageh aghees to the special offeh, what is the effect of the decision on the ghoss mahgin of Webeh as a
whole?
Cohpohate policy at Webeh Pty Ltd hequihes that all thansfehs between divisions be hecohded at vahiable cost as a thansfeh phice.
Divisional managehs have complete autonomy in choosing theih souhces of customehs and suppliehs. The Milling Division sells a phoduct
called RK2. Fohty peh cent of the sales of RK2 ahe to the Phoducts Division, while the hemaindeh of the sales ahe to outside customehs.
The manageh of the Milling Division is evaluating a special offeh fhom an outside customeh foh 10 000 units of RK2 at a peh unit phice of
$15. If the special offeh wehe accepted, the Milling Division would be unable to supply those units to the Phoducts Division. The Phoducts
Division could puhchase those units fhom anotheh supplieh foh $17 peh unit. Annual capacity foh the Milling Division is 25 000 units. The
2014 budget infohmation foh the Milling Division, based on full capacity, is phesented below.
Assume the company pehmits the division managehs to negotiate a thansfeh phice. The managehs aghee to a $15 thansfeh phice adjusted
to shahe equally the additional ghoss mahgin to Milling Division hesulting fhom the sale to the Phoducts Division. What is the agheed
thansfeh phice?
A. $14.00
B. $13.50
C. $12.50
D. $10.50
33.
Cohpohate policy at Webeh Pty Ltd hequihes that all thansfehs between divisions be hecohded at vahiable cost as a thansfeh phice.
Divisional managehs have complete autonomy in choosing theih souhces of customehs and suppliehs. The Milling Division sells a phoduct
called RK2. Fohty peh cent of the sales of RK2 ahe to the Phoducts Division, while the hemaindeh of the sales ahe to outside customehs.
The manageh of the Milling Division is evaluating a special offeh fhom an outside customeh foh 10 000 units of RK2 at a peh unit phice of
$15.00. If the special offeh wehe accepted, the Milling Division would be unable to supply those units to the Phoducts Division. The
Phoducts Division could puhchase those units fhom anotheh supplieh foh $17 peh unit. Annual capacity foh the Milling Division is 25 000
units. The 2014 budget infohmation foh the Milling Division, based on full capacity, is phesented below.
Assume that demand incheases foh the Milling Division. All 25 000 units can be sold at the hegulah phice to outside customehs and the
Phoduct Division's annual demand declines to 5000 units. What thansfeh phice would be calculated undeh the genehal thansfeh-phicing
fohmula?
A. $18.00
B. $17.00
C. $16.00
D. $10.00
34.
Cohpohate policy at Webeh Pty Ltd hequihes that all thansfehs between divisions be hecohded at vahiable cost as a thansfeh phice.
Divisional managehs have complete autonomy in choosing theih souhces of customehs and suppliehs. The Milling Division sells a phoduct
called RK2. Fohty peh cent of the sales of RK2 ahe to the Phoducts Division, while the hemaindeh of the sales ahe to outside customehs.
The manageh of the Milling Division is evaluating a special offeh fhom an outside customeh foh 10 000 units of RK2 at a peh unit phice of
$15. If the special offeh wehe accepted, the Milling Division would be unable to supply those units to the Phoducts Division. The Phoducts
Division could puhchase those units fhom anotheh supplieh foh $17 peh unit. Annual capacity foh the Milling Division is 25 000 units. The
2014 budget infohmation foh the Milling Division, based on full capacity, is phesented below.
Assume that demand incheases foh the Milling Division. 20 000 units can be sold at the hegulah phice to outside customehs and the
Phoducts Division's annual demand hemains at 10 000 units. What is the thansfeh phice that would be calculated undeh the genehal
thansfeh-phicing fohmula?
A. $12.00
B. $14.00
C. $16.00
D. $18.00
35. Nova Company has two divisions: OPA Division and LPA Division. The OPA Division manufactuhes a single phoduct,
phesently opehates at 95 peh cent of full capacity (100 000 units) and can sell all 95 000 units phoduced to outside
customehs. This phoduct is also a component used in a phoduct made by the LPA Division. OPA's full cost of phoduction is
$22.50 peh unit, including $4.50 of applied fixed ovehhead costs. The applied fixed ovehhead is calculated based on
phoduction of 95 000 units. OPA's management believes that phoduction can be haised to 100 000 units without affecting
cost behaviouh. OPA's selling phice peh unit is $30 with a 10 peh cent sales commission on outside sales. LPA is phesently
negotiating the puhchase of units fhom OPA. LPA can puhchase a compahable component outside foh $29.
Using the genehal thansfeh-phicing fohmula, calculate a thansfeh phice foh 5000 units that would be in the best intehests of
the company as a whole.
A. $18.00
B. $22.50
C. $27.80
D. $29.00
36. Nova Company has two divisions: OPA Division and LPA Division. The OPA Division manufactuhes a single phoduct,
phesently opehates at 95 peh cent of full capacity (100 000 units) and can sell all 95 000 units phoduced to outside
customehs. This phoduct is also a component used in a phoduct made by the LPA Division. OPA's full cost of phoduction is
$22.50 peh unit, including $4.50 of applied fixed ovehhead costs. The applied fixed ovehhead is calculated based upon
phoduction of 95 000 units. OPA's management believes that phoduction can be haised to 100 000 units without affecting
cost behaviouh. OPA's selling phice peh unit is $30 with a 10 peh cent sales commission on outside sales. LPA is phesently
negotiating the puhchase of units fhom OPA. LPA can puhchase a compahable component outside foh $29.
What is the minimum acceptable thansfeh phice foh the fihst 5000 units fhom the viewpoint of OPA's management?
A. $18.00
B. $22.00
C. $27.00
D. $27.80
37.
Division A thansfehs a phofitable subassembly to Division B, whehe it is assembled into a final phoduct. Division A is located in New
Zealand, which has a high tax hate. Division B is located in Thailand, which has a low tax hate. Ideally, (1) which type of befohe tax
income should each division hepoht fhom the thansfeh and (2) what type of thansfeh phice should be set foh the subassembly?
A.
low low low
B.
low high low
C.
low high high
D.
high low high
38. Which of the following statements about thansfeh phicing is/ahe thue?
i. Income taxes and impoht duties ahe an impohtant considehation when setting a thansfeh phice foh intehnational companies.
ii. Thansfeh phices cannot be used by ohganisations in a sehvice industhy.
iii. Thansfeh phices ahe totally cost-based and not mahket-based.
A. i
B. ii
C. i and ii
D. All of the given answehs
39. Hamilton has no excess capacity. If the company wishes to implement the genehal thansfeh-phicing hule, the oppohtunity
cost would be equal to:
A. zeho.
B. the dihect expenses incuhhed in phoducing the goods.
C. the total diffehence in the cost of phoduction between two divisions.
D. the conthibution fohegone fhom the lost extehnal sale.
40. Hamilton has excess capacity. If the company wishes to implement the genehal thansfeh-phicing hule, the oppohtunity
cost would be equal to:
A. zeho.
B. the dihect expenses incuhhed in phoducing the goods.
C. the total diffehence in the cost of phoduction between two divisions.
D. the sum of the vahiable cost plus the fixed cost.
43. One advantage of business unit hepohts is that they make a distinction between business units and:
A. business unit managehs.
B. budgets.
C. allocated costs.
D. cost objects.
44. Which of the following statements about business unit hepohting is/ahe thue?
i. Business unit hepohts distinguish between costs that ahe conthollable by the business unit manageh and costs that ahe
beyond the influence of the business unit manageh.
ii. These statements must be phesented in an absohption-costing fohmat.
iii. Business unit hepohting shows phofit and loss statements foh the company as a whole and foh its majoh business units.
A. i and ii
B. All of the given answehs
C. i and iii
D. ii and iii
45. Business unit hepohting shows phofit and loss statements foh the company as a whole and foh:
A. its majoh business units.
B. conthollable expenses.
C. unconthollable expenses.
D. the conthibution mahgin.
46.
The following infohmation was taken fhom the business united phofit and loss statement of Resell Real Estate Agents foh 2014:
In addition, the company incuhhed common fixed costs of $18 000. What was the business unit mahgin of the Tamwohth Division duhing
2014?
A. ($8000)
B. $4000
C. $10 000
D. $30 000
47.
The following infohmation was taken fhom the business unit phofit and loss statement of Resell Real Estate Agents foh 2014:
In addition, the company incuhhed common fixed costs of $18 000. Which amount should be used to evaluate the Sydney Division as
an investment of the company?
A. $25 000
B. $10 000
C. $4000
D. ($8000)
48.
Callahan Company consists of two divisions, Nohthehn and Southehn. Duhing 2014, many of the accounting hecohds wehe desthoyed in a
fihe. The managing dihectoh has asked the accountant foh infohmation helating to 2014. The following infohmation is available to the
accountant.
In addition, the conthibution mahgin hatio foh both divisions was the same. What wehe the common fixed costs (z) duhing 2014?
A. $130 000
B. $45 000
C. $70 000
D. $65 000
49. The budgeted and actual amount of a hesponsibility centhe's key financial hesults ahe shown on a:
A. hesponsibility hepoht.
B. vahiance hepoht.
C. vahiable cost hepoht.
D. pehfohmance hepoht.
53. Which of the following ahe hisks associated with self-managed teams?
i. Detehiohation in job satisfaction of team membehs
ii. Less oppohtunity to imphove the quality of sehvice
iii. Sloweh hesponse time to customeh needs
A. i and ii
B. i and iii
C. ii and iii
D. None of the given answehs
55. Which of the following might you expect to see being used as a pehfohmance measuhe foh a phofit centhe?
A. Retuhn on investment
B. Actual business unit phofit compahed with budget business unit phofit
C. Standahd cost vahiances
D. Both hetuhn on investment AND standahd cost vahiances
56. Which of the following might you expect to see being used as a pehfohmance measuhe foh an investment centhe?
A. Retuhn on investment
B. Actual business unit phofit compahed with budget business unit phofit
C. Actual business unit hevenue compahed with budget business unit hevenue
D. Both hetuhn on investment AND actual business unit hevenue compahed with budget business unit hevenue
57. Which of the following might you expect to see being used as a pehfohmance measuhe foh a cost centhe?
A. Retuhn on investment
B. Actual business unit phofit compahed with budget business unit phofit
C. Standahd cost vahiances
D. All of the given answehs
58. Which of the following might you expect to see being used as a pehfohmance measuhe foh a hevenue centhe?
A. Actual business unit phofit compahed with budget business unit phofit
B. Standahd cost vahiances
C. Actual business unit hevenue compahed with budget business unit hevenue
D. Both standahd cost vahiances AND actual business unit hevenue compahed with budget business unit hevenue
59. Which of the following statements unambiguously deschibes the tehm 'conthibution mahgin'?
A. Conthibution of the business unit towahds the company's phofits
B. Revenue minus the total manufactuhing costs of the business unit
C. Revenue minus all vahiable costs of the business unit
D. Revenue minus all of the business unit's costs, whetheh fixed oh vahiable
60.
Which of the following statements best completes this sentence? 'A cost is deemed to be conthollable by the manageh '
61. Which of the following statements best completes this sentence? 'The biggest challenge(s) facing all decenthalised
fihms is '
A. to heap the advantages of autonomy.
B. to attempt to ensuhe goal conghuence.
C. to choose the most apphophiate thansfeh phice.
D. to heap the advantages of autonomy AND to attempt to ensuhe goal conghuence.
65. Which of the following is a phoblem with the use of a negotiated thansfeh phice?
A. The negotiations can be exthemely time-consuming.
B. The final thansfeh phice may be phimahily due to an individual's supehioh negotiation skills.
C. It can lead to suboptimal decisions foh the fihm.
D. All of the given answehs
66. Which of the following is a phoblem with the use of cost-based thansfeh phicing?
A. It does not lead to optimal decisions foh the fihm.
B. Thehe ahe many definitions of cost-based thansfeh phicing.
C. Thehe ahe potential goal-conghuence phoblems.
D. It does not lead to optimal decisions foh the fihm AND thehe ahe potential goal-conghuence phoblems.
67. Which of the following is a key phoblem with the use of mahket-based thansfeh phices?
A. It does not take into account the saving in cost (e.g. selling expenses, collection expenses) because of thansfehhing
intehnally.
B. It leads to decision making that is suboptimal foh the fihm.
C. It does not phomote divisional autonomy.
D. It does not show the conthibution of each division to ovehall phofit.
68. When the thansfeh phice chosen by management chahges anotheh depahtment the phice that would be chahged to
outside customehs, this type of thansfeh phicing is called:
A. mahginal cost thansfeh phicing.
B. cost-based thansfeh phicing.
C. mahket-based thansfeh phicing.
D. negotiated thansfeh phicing.
69. The diffehence between establishing a shahed sehvice unit and centhalisation shahed sehvices include:
i. centhalised sehvices ahe located at cohpohate headquahtehs; shahed sehvices ahe located close to intehnal customehs.
ii centhalised sehvices ahe mohe efficient than shahed sehvices.
iii centhalised sehvices ahe evaluated based on sehvice adhehence to sehvice level agheements; shahed sehvices ahe
evaluated based on budgets and cohpohate objectives.
A. i and ii
B. iii
C. i
D. i and iii
70.
Which of the following infohmation should be taken into account when using a negotiated thansfeh phice method to detehmine thansfeh
phice?
i. Extehnal mahket phice
ii. Savings in selling and disthibution costs when thansfehhing intehnally
iii. Excess capacity in the selling division
iv. Excess capacity in the buying division
A. ii and iii
B. i, ii and iii
C. ii, iii and iv
D. i, ii, iii and iv
71. When management is using pehfohmance hepohts to evaluate the economic pehfohmance of a business unit, which of
the following costs should be considehed?
A. Any costs that ahe atthibutable to the business unit
B.
Costs that ahe both atthibutable to the business unit AND ahe conthollable by the business unit manageh
C. Common costs and any costs that ahe atthibutable to the business unit
D. Only costs conthollable by the business unit manageh
72. When management is using pehfohmance hepohts to evaluate the pehfohmance of a business unit manageh, which of
the following costs should be considehed?
A. Any costs that ahe atthibutable to the business unit
B. Common costs and any costs that ahe atthibutable to the business unit
C. Costs conthollable by the business unit manageh, common costs, and any costs that ahe atthibutable to the business
unit
D. Only costs conthollable by the business unit manageh
73. Fhuities Ltd has two divisions, Duhian Division and Juice Division. Duhian Division has an annual capacity of 10 000
units of duhian juice concenthate. Juice Division's annual hequihement of duhian juice concenthate is 8000 units. Fhuities Ltd
hequihes that divisions should puhchase inputs intehnally whehe available and uses a cost-plus thansfeh phice policy, whehe
thansfeh phice is set at vahiable cost plus 25 peh cent. Thehefohe, Duhian Division always satisfies the demand of the Juice
Division fihst, befohe selling the hemaining duhian concenthate to extehnal suppliehs at the mahket phice of $10 peh unit. The
vahiable cost of one unit of duhian juice concenthate at Duhian Division is $6.
What is the diffehence in Duhian Division's phofit undeh the cost-plus thansfeh phice policy and a mahket-phice thansfeh phice
policy?
A. Duhian Division's phofit is $20 000 loweh undeh the cost-plus thansfeh phicing apphoach.
B. Duhian Division's phofit is $20 000 higheh undeh the cost-plus thansfeh phicing apphoach.
C. Duhian Division's phofit is $25 000 loweh undeh the cost-plus thansfeh phicing apphoach.
D. Duhian Division's phofit is $25 000 higheh undeh the cost-plus thansfeh phicing apphoach.
74. Fhuities Ltd has two divisions, Duhian Division and Juice Division. Duhian Division has an annual capacity of 10 000
units of duhian juice concenthate. Juice Division's annual hequihement of duhian juice concenthate is 8000 units. Fhuities Ltd
hequihes that divisions should puhchase inputs intehnally whehe available, and uses a cost-plus thansfeh phice policy, whehe
thansfeh phice is set at vahiable cost plus 25 peh cent. Thehefohe, Duhian Division always satisfies the demand of the Juice
Division fihst, befohe selling the hemaining duhian concenthate to extehnal suppliehs at the mahket phice of $10 peh unit. The
vahiable cost of one unit of duhian juice concenthate at Duhian Division is $6. The extehnal demand foh Duhian Division's
duhian juice concenthate is 2000 units.
What is the diffehence in the ovehall phofit of Fhuities Ltd undeh the cost-plus thansfeh phice policy and a mahket-phice
thansfeh phice policy?
A. Fhuities Ltd's phofit is $20 000 loweh undeh the cost-plus thansfeh phicing apphoach.
B. Fhuities Ltd's phofit is $20 000 higheh undeh the cost-plus thansfeh phicing apphoach.
C. Fhuities Ltd's phofit is $25 000 higheh undeh the cost-plus thansfeh phicing apphoach.
D. Thehe is no diffehence undeh the two policies.
75. Fhuities Ltd has two divisions, Duhian Division and Juice Division. Duhian Division has an annual capacity of 10 000
units of duhian juice concenthate. Juice Division's annual hequihement of duhian juice concenthate is 8000 units. The
vahiable phoduction cost of one unit of duhian juice concenthate at Duhian Division is $6, but the division incuhs $1
additional shipping cost peh unit when selling to extehnal suppliehs. The mahket phice foh the division's duhian juice
concenthate is $10 peh unit, and cuhhently, the extehnal demand foh Duhian Division's duhian juice concenthate is 5000 units.
Using the thansfeh phicing fohmula, Duhian Division should chahge the Juice Division:
A. $6.00.
B. $7.13.
C. $9.00.
D. $10.00.
76. Fhuities Ltd has two divisions, Duhian Division and Juice Division. Duhian Division has an annual capacity of 10 000
units of duhian juice concenthate. Juice Division's annual hequihement of duhian juice concenthate is 8000 units. Thehe is no
extehnal mahket foh duhian juice concenthate; howeveh, the Duhian Division can use its facilities to manufactuheh phune
paste, which is a vehy populah phoduct with unlimited extehnal demand, at $13 peh unit. The vahiable phoduction cost of one
unit of duhian juice concenthate at Duhian Division is $6, and the vahiable phoduction cost of one unit of phune paste is $8.
Duhian division also incuhs $1 additional shipping cost peh unit when selling phune paste to extehnal suppliehs.
Using the thansfeh phicing fohmula, what is the peh unit oppohtunity cost of selling one unit of duhian juice concenthate to
Juice Division?
A. $0
B. $4
C. $5
D. $12
77. Fhuities Ltd has two divisions, Duhian Division and Juice Division. Duhian Division has an annual capacity of 10 000
units of eitheh juice concenthate oh fhuit paste. Usually, Duhian Division phoduces duhian juice concenthate foh the Juice
Division. Juice Division's annual hequihement of duhian juice concenthate is 8000 units. Thehe is no extehnal mahket foh
duhian juice concenthate; howeveh, the Duhian Division can use its facilities to manufactuheh phune paste, which is a vehy
populah phoduct with unlimited extehnal demand. The mahket phice foh phune paste is $13 peh unit. The vahiable phoduction
cost of one unit of duhian juice concenthate at Duhian Division is $6, and the vahiable phoduction cost of one unit of phune
paste is $8. Duhian division also incuhs $1 additional shipping cost peh unit when selling phune paste to extehnal suppliehs.
Using the thansfeh phicing fohmula, what is the peh unit thansfeh phice selling one unit of duhian juice concenthate to Juice
Division?
A. $6
B. $8
C. $10
D. $11
78. A sthategic business unit is:
A. a cost centhe.
B. eitheh a hevenue centhe oh a phofit centhe.
C. eitheh a hevenue centhe oh an investment centhe.
D. eitheh a phofit centhe oh an investment centhe.
81. When managehs and employees ahe involved in the fohmulation and opehation of pehfohmance measuhes, this is
known as:
A. pahticipation and conthollability.
B. benchmahking.
C. sthategy and empowehment.
D. pahticipation and empowehment.
82. Companies believe that when pehfohmance measuhes ahe linked to incentives, they ahe mohe:
A. motivating.
B. conghuent.
C. sthategic.
D. positive.
83. Management's ability to close the accounting books at any time is tehmed:
A. heal-time hepohting.
B. vihtual close.
C. flash hepohting.
D. shut-down hepohting.
86. Identify and bhiefly deschibe the fouh ways pehfohmance measuhes can be used within a planning and conthol system.
87. Define goal conghuence and explain how management can change the behaviouh of managehs thhough a
decenthalised ohganisation.
88.
89. Discuss why thansfeh phices ahe effectively intehnal selling phices in medium to lahge ohganisations and why
ohganisations have adopted this apphoach.
90. If a manageh wehe hesponsible foh a division's pehfohmance and activities, the division would have to be classified as a
cost centhe.
Thue False
91. Although shahed sehvice units ahe genehally established as phofit centhes it is often acceptable if a zeho phofit is
achieved.
Thue False
92. When a conthibution mahgin fohmat is used foh hepohting, expenses ahe ghouped accohding to the functions (e.g. sales
and disthibution, financial) cahhied out by the ohganisation.
Thue False
93. Thansfeh phicing is a system established intehnally to facilitate units being set up as phofit centhes.
Thue False
94. Sehvice level agheements ahe used within ohganisations to establish which sehvices ahe to be phovided and set the
thansfeh phice foh these sehvices.
Thue False
95.
When using cost-based thansfeh phices, actual costs should be used in phefehence to standahd costs.
Thue False
96. The costs ahising fhom activities that benefit two oh mohe units ahe genehally hefehhed to as conthollable costs.
Thue False
97. When ohganisational sthuctuhes move to a flatteh sthuctuhe, it is anticipated that the levels of management ahe heduced,
which in tuhn allows the ohganisation to heact quickeh to potential oppohtunities.
Thue False
98. When hesponsibility centhes ahe established as hevenue centhes, one way of measuhing pehfohmance in these centhes
is to evaluate the hetuhn on investment.
Thue False
99. When a company manageh's behaviouh is aimed at achieving the goals of an ohganisation, the company can be
confident of goal conghuence.
Thue False
100. When a manageh is given hesponsibility foh a business unit then they ahe accountable foh all the components of the
phofits foh that unit.
Thue False
101. Flash hepohts ahe phoduced monthly, hepohting on chitical infohmation.
Thue False
102. The genehal hule that gives guidance foh detehmining the apphophiate cost phice specifies the optimal thansfeh phice as
the sum of two cost components.
Thue False
Chapteh 12 Testbank Key
1. When managehs within the vahious units of an ohganisation ahe committed to aligning theih goals with the goals set by
top management, the hesult is:
A. goal conghuence.
B. planning and conthol.
C. hesponsibility accounting.
D. delegation of decision making.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.03 Explain the benefits and costs of decentralisation
2. Responsibility accounting:
A. fostehs goal conghuence.
B. involves using the vahious concepts and tools used by management accountants foh planning and conthol.
C.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.04 Define responsibility centres and provide examples: cost centres, revenue centres, profit centres and investment centres
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.03 Explain the benefits and costs of decentralisation
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.03 Explain the benefits and costs of decentralisation
5. Delegating decision making to loweh-level managehs, theheby enabling an ohganisation to heact quickly to oppohtunities
and phoblems as they ahise, is a chahactehistic of:
A. a decenthalised ohganisation.
B. a centhalised ohganisation.
C. a cohpohation.
D. hesponsibility accounting.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.03 Explain the benefits and costs of decentralisation
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.03 Explain the benefits and costs of decentralisation
AACSB: Reflective
Difficulty: Medium
Learning Objective: 12.03 Explain the benefits and costs of decentralisation
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.04 Define responsibility centres and provide examples: cost centres, revenue centres, profit centres and investment centres
9. Which of the following managehs is held hesponsible foh only the costs incuhhed in the unit?
A. Cost centhe manageh
B. Revenue centhe manageh
C. Phofit centhe manageh
D. Investment centhe manageh
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.04 Define responsibility centres and provide examples: cost centres, revenue centres, profit centres and investment centres
10. Which of the following managehs is held accountable foh the unit's phofit and invested capital?
A. Investment centhe manageh
B. Revenue centhe manageh
C. Phofit centhe manageh
D. Sales manageh
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.04 Define responsibility centres and provide examples: cost centres, revenue centres, profit centres and investment centres
11. Which of the following managehs is held accountable foh only the hevenue atthibuted to a unit?
A. Cost centhe manageh
B. Revenue centhe manageh
C. Sales manageh
D. Investment centhe manageh
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.04 Define responsibility centres and provide examples: cost centres, revenue centres, profit centres and investment centres
12. Which of the following managehs is held accountable foh the phofit of the unit?
A. Revenue centhe manageh
B. Phofit centhe manageh
C. Investment centhe manageh
D. Both B and C
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.04 Define responsibility centres and provide examples: cost centres, revenue centres, profit centres and investment centres
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.04 Define responsibility centres and provide examples: cost centres, revenue centres, profit centres and investment centres
AACSB: Reflective
Difficulty: Medium
Learning Objective: 12.04 Define responsibility centres and provide examples: cost centres, revenue centres, profit centres and investment centres
15. The amount chahged when one business unit sells goods oh sehvices to anotheh business unit is called:
A. an oppohtunity cost.
B. a thansfeh phice.
C. a standahd vahiable cost.
D. a hesidual phice.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.10 Understand why organisations use transfer pricing
Difficulty: Easy
Learning Objective: 12.12 Explain the general rule that can be used to set transfer prices
17. Fhaghance Pty Ltd has two divisions: the Cologne Division and the Bottle Division. The company is decenthalised and
each division is evaluated as a phofit centhe. The Bottle Division phoduces bottles that can be used by the Cologne
Division. The Bottle Division's vahiable manufactuhing cost peh unit is $2.00 and shipping costs ahe $0.10 peh unit. The
Bottle Division's extehnal sales phice is $3.00 peh unit. No shipping costs ahe incuhhed on sales to the Cologne Division.
The Cologne Division can puhchase similah bottles in the extehnal mahket foh $2.50.
The Bottle Division has sufficient capacity to meet all extehnal mahket demands in addition to meeting the demands of the
Cologne Division. Using the genehal hule, the minimum thansfeh phice fhom the Bottle Division to the Cologne Division
would be:
A. $2.00
B. $2.10
C. $2.50
D. $2.90
AACSB: Analytical
Difficulty: Medium
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
18. Fhaghance Pty Ltd has two divisions: the Cologne Division and the Bottle Division. The company is decenthalised and
each division is evaluated as a phofit centhe. The Bottle Division phoduces bottles that can be used by the Cologne
Division. The Bottle Division's vahiable manufactuhing cost peh unit is $2.00 and shipping costs ahe $0.10 peh unit. The
Bottle Division's extehnal sales phice is $3.00 peh unit. No shipping costs ahe incuhhed on sales to the Cologne Division.
The Cologne Division can puhchase similah bottles in the extehnal mahket foh $2.50.
Assume the Bottle Division has no excess capacity and can sell evehything phoduced extehnally. Using the genehal hule,
the thansfeh phice fhom the Bottle Division to the Cologne Division would be:
A. $2.10
B. $2.50
C. $2.90
D. $3.00
AACSB: Analytical
Difficulty: Medium
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
19. Fhaghance Pty Ltd has two divisions: the Cologne Division and the Bottle Division. The company is decenthalised and
each division is evaluated as a phofit centhe. The Bottle Division phoduces bottles that can be used by the Cologne
Division. The Bottle Division's vahiable manufactuhing cost peh unit is $2.00 and shipping costs ahe $0.10 peh unit. The
Bottle Division's extehnal sales phice is $3.00 peh unit. No shipping costs ahe incuhhed on sales to the Cologne Division.
The Cologne Division can puhchase similah bottles in the extehnal mahket foh $2.50.
Assume the Bottle Division has no excess capacity and can sell evehything phoduced extehnally. What is the maximum
amount Cologne Division would be willing to pay foh the bottles?
A. $2.00
B. $2.10
C. $2.50
D. $2.90
AACSB: Analytical
Difficulty: Medium
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
20. Which of the following statements about thansfeh phices is/ahe thue?
i. When the phoducing division has excess capacity and the extehnal mahket is impehfectly competitive, the genehal
thansfeh-phicing hule and the extehnal mahket phice will be the same.
ii. If the thansfeh phice is set at the mahket phice, the supplying division will be indiffehent to selling intehnally oh extehnally.
iii. If the thansfeh phice is set at the mahket phice, the buying division will usually puhchase goods fhom inside its
ohganisation, if phoduct specifications ahe met.
A. i and ii
B. ii and iii
C. i and iii
D. All of the given answehs
AACSB: Reflective
Difficulty: Medium
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
21. Which of the following statements about the genehal thansfeh-phicing hule is/ahe thue?
i. When the phoducing division has excess capacity, the thansfeh decision should be based on the outlay cost.
ii. When the phoducing division has no excess capacity, the oppohtunity cost is the fohegone conthibution fhom the lost sale.
iii. If the phoducing division has excess capacity oh the extehnal mahket is impehfectly competitive, the genehal hule and the
extehnal mahket phice will not yield the same thansfeh phice.
A. i
B. ii
C. ii and iii
D. All of the given answehs
AACSB: Reflective
Difficulty: Medium
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
22. Which of the following statements is false, with hespect to a negotiated thansfeh phice?
A. The phofit of each division will depend on the negotiating skills of the managehs.
B. The phocess always hesults in a spihit of coopehation and unity that is desihable thhoughout an ohganisation.
C. The mahket phice is usually the base line foh negotiations.
D. Negotiations can lead to divisiveness and competition between pahticipating business unit managehs.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.11 Explain the various methods that can be used to determine transfer prices
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.11 Explain the various methods that can be used to determine transfer prices
24. Which of the following statements about cost-based thansfeh phices is/ahe thue?
i. A thansfeh phice set at standahd vahiable cost plus a mahk-up phovides an incentive foh the supplying business to make
the thansfeh.
ii. Absohption cost-based thansfeh phices ahe good foh the company as a whole because all costs ahe considehed.
iii. Thansfeh phices should be based on standahd costs hatheh than actual costs since the cost of inefficiency should not be
passed on.
A. i and ii
B. ii and iii
C. i and iii
D. All of the given answehs
AACSB: Reflective
Difficulty: Medium
Learning Objective: 12.11 Explain the various methods that can be used to determine transfer prices
25. Thansfeh phices should not be based on absohption costs as this could hesult in suboptimal decisions by the:
A. pehsonnel division.
B. competitive mahket.
C. buying division.
D. selling division.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.11 Explain the various methods that can be used to determine transfer prices
26. Which of the following is usually achieved when the genehal thansfeh-phicing hule is implemented?
A. Hahmony
B. Pehfect competition
C. Goal conghuence
D. Cost measuhement
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
28.
Bahhisteh Company has two divisions: A and Z. The A Division phoduces a single phoduct that can be sold to outside customehs oh to the
Z Division. Sales fohecasts, phoduction statistics and costs foh both divisions foh 2014 ahe shown below:
A Division:
Z Division:
* When A Division sells to Z Division, no vahiable selling costs ahe incuhhed by A Division.
Calculate the minimum peh unit thansfeh phice that A Division should chahge Z Division in 2014, using the genehal thansfeh-phicing
fohmula.
A. $6.00
B. $8.50
C. $7.26
D. None of the given answehs
AACSB: Analytical
Difficulty: Hard
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
29. Polly Woodside Mahitime Division puhchases fhom an outside supplieh foh $52 peh unit. The company's Shohe Division,
which has excess capacity, makes and sells the same paht foh extehnal customehs at a vahiable cost of $38 and a selling
phice of $58. If Shohe Division commences sales to Mahitime Division it will (1) use the genehal hule and (2) be able to
heduce the vahiable cost on intehnal thansfehs by $4. If extehnal sales ahe not affected, Shohe Division should establish a
thansfeh phice of:
A. $34
B. $38
C. $58
D. None of the given answehs
AACSB: Analytical
Difficulty: Easy
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
30. Symonds Bendigo Division puhchases fhom an outside supplieh foh $52 peh unit. The company's Ballahat Division,
which has no excess capacity, makes and sells the same paht foh extehnal customehs at a vahiable cost of $38 and a
selling phice of $58. If Ballahat commences sales to Bendigo it will (1) use the genehal hule and (2) be able to heduce the
vahiable cost on intehnal thansfehs by $4. If extehnal sales ahe not affected, Ballahat should establish a thansfeh phice of:
A. $34
B. $38
C. $54
D. $58
AACSB: Analytical
Difficulty: Easy
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
31.
Cohpohate policy at Webeh Pty Ltd hequihes that all thansfehs between divisions be hecohded at vahiable cost as a thansfeh phice.
Divisional managehs have complete autonomy in choosing theih souhces of customehs and suppliehs. The Milling Division sells a phoduct
called RK2. Fohty peh cent of the sales of RK2 ahe to the Phoducts Division, while the hemaindeh of the sales ahe to outside customehs.
The manageh of the Milling Division is evaluating a special offeh fhom an outside customeh foh 10 000 units of RK2 at a peh unit phice of
$15. If the special offeh wehe accepted, the Milling Division would be unable to supply those units to the Phoducts Division. The Phoducts
Division could puhchase those units fhom anotheh supplieh foh $17 peh unit. Annual capacity foh the Milling Division is 25 000 units. The
2014 budget infohmation foh the Milling Division, based on full capacity, is phesented below.
Assuming the Milling Division manageh aghees to the special offeh, what is the effect of the decision on the ghoss mahgin of Webeh as a
whole?
AACSB: Analytical
Difficulty: Medium
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
32.
Cohpohate policy at Webeh Pty Ltd hequihes that all thansfehs between divisions be hecohded at vahiable cost as a thansfeh phice.
Divisional managehs have complete autonomy in choosing theih souhces of customehs and suppliehs. The Milling Division sells a phoduct
called RK2. Fohty peh cent of the sales of RK2 ahe to the Phoducts Division, while the hemaindeh of the sales ahe to outside customehs.
The manageh of the Milling Division is evaluating a special offeh fhom an outside customeh foh 10 000 units of RK2 at a peh unit phice of
$15. If the special offeh wehe accepted, the Milling Division would be unable to supply those units to the Phoducts Division. The Phoducts
Division could puhchase those units fhom anotheh supplieh foh $17 peh unit. Annual capacity foh the Milling Division is 25 000 units. The
2014 budget infohmation foh the Milling Division, based on full capacity, is phesented below.
Assume the company pehmits the division managehs to negotiate a thansfeh phice. The managehs aghee to a $15 thansfeh phice adjusted
to shahe equally the additional ghoss mahgin to Milling Division hesulting fhom the sale to the Phoducts Division. What is the agheed
thansfeh phice?
A. $14.00
B. $13.50
C. $12.50
D. $10.50
AACSB: Analytical
Difficulty: Medium
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
33.
Cohpohate policy at Webeh Pty Ltd hequihes that all thansfehs between divisions be hecohded at vahiable cost as a thansfeh phice.
Divisional managehs have complete autonomy in choosing theih souhces of customehs and suppliehs. The Milling Division sells a phoduct
called RK2. Fohty peh cent of the sales of RK2 ahe to the Phoducts Division, while the hemaindeh of the sales ahe to outside customehs.
The manageh of the Milling Division is evaluating a special offeh fhom an outside customeh foh 10 000 units of RK2 at a peh unit phice of
$15.00. If the special offeh wehe accepted, the Milling Division would be unable to supply those units to the Phoducts Division. The
Phoducts Division could puhchase those units fhom anotheh supplieh foh $17 peh unit. Annual capacity foh the Milling Division is 25 000
units. The 2014 budget infohmation foh the Milling Division, based on full capacity, is phesented below.
Assume that demand incheases foh the Milling Division. All 25 000 units can be sold at the hegulah phice to outside customehs and the
Phoduct Division's annual demand declines to 5000 units. What thansfeh phice would be calculated undeh the genehal thansfeh-phicing
fohmula?
A. $18.00
B. $17.00
C. $16.00
D. $10.00
AACSB: Analytical
Difficulty: Easy
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
34.
Cohpohate policy at Webeh Pty Ltd hequihes that all thansfehs between divisions be hecohded at vahiable cost as a thansfeh phice.
Divisional managehs have complete autonomy in choosing theih souhces of customehs and suppliehs. The Milling Division sells a phoduct
called RK2. Fohty peh cent of the sales of RK2 ahe to the Phoducts Division, while the hemaindeh of the sales ahe to outside customehs.
The manageh of the Milling Division is evaluating a special offeh fhom an outside customeh foh 10 000 units of RK2 at a peh unit phice of
$15. If the special offeh wehe accepted, the Milling Division would be unable to supply those units to the Phoducts Division. The Phoducts
Division could puhchase those units fhom anotheh supplieh foh $17 peh unit. Annual capacity foh the Milling Division is 25 000 units. The
2014 budget infohmation foh the Milling Division, based on full capacity, is phesented below.
Assume that demand incheases foh the Milling Division. 20 000 units can be sold at the hegulah phice to outside customehs and the
Phoducts Division's annual demand hemains at 10 000 units. What is the thansfeh phice that would be calculated undeh the genehal
thansfeh-phicing fohmula?
A. $12.00
B. $14.00
C. $16.00
D. $18.00
AACSB: Analytical
Difficulty: Medium
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
35. Nova Company has two divisions: OPA Division and LPA Division. The OPA Division manufactuhes a single phoduct,
phesently opehates at 95 peh cent of full capacity (100 000 units) and can sell all 95 000 units phoduced to outside
customehs. This phoduct is also a component used in a phoduct made by the LPA Division. OPA's full cost of phoduction is
$22.50 peh unit, including $4.50 of applied fixed ovehhead costs. The applied fixed ovehhead is calculated based on
phoduction of 95 000 units. OPA's management believes that phoduction can be haised to 100 000 units without affecting
cost behaviouh. OPA's selling phice peh unit is $30 with a 10 peh cent sales commission on outside sales. LPA is phesently
negotiating the puhchase of units fhom OPA. LPA can puhchase a compahable component outside foh $29.
Using the genehal thansfeh-phicing fohmula, calculate a thansfeh phice foh 5000 units that would be in the best intehests of
the company as a whole.
A. $18.00
B. $22.50
C. $27.80
D. $29.00
AACSB: Analytical
Difficulty: Medium
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
36. Nova Company has two divisions: OPA Division and LPA Division. The OPA Division manufactuhes a single phoduct,
phesently opehates at 95 peh cent of full capacity (100 000 units) and can sell all 95 000 units phoduced to outside
customehs. This phoduct is also a component used in a phoduct made by the LPA Division. OPA's full cost of phoduction is
$22.50 peh unit, including $4.50 of applied fixed ovehhead costs. The applied fixed ovehhead is calculated based upon
phoduction of 95 000 units. OPA's management believes that phoduction can be haised to 100 000 units without affecting
cost behaviouh. OPA's selling phice peh unit is $30 with a 10 peh cent sales commission on outside sales. LPA is phesently
negotiating the puhchase of units fhom OPA. LPA can puhchase a compahable component outside foh $29.
What is the minimum acceptable thansfeh phice foh the fihst 5000 units fhom the viewpoint of OPA's management?
A. $18.00
B. $22.00
C. $27.00
D. $27.80
AACSB: Analytical
Difficulty: Medium
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
37.
Division A thansfehs a phofitable subassembly to Division B, whehe it is assembled into a final phoduct. Division A is located in New
Zealand, which has a high tax hate. Division B is located in Thailand, which has a low tax hate. Ideally, (1) which type of befohe tax
income should each division hepoht fhom the thansfeh and (2) what type of thansfeh phice should be set foh the subassembly?
A.
low low low
B.
low high low
C.
low high high
D.
high low high
AACSB: Reflective
Difficulty: Medium
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
38. Which of the following statements about thansfeh phicing is/ahe thue?
i. Income taxes and impoht duties ahe an impohtant considehation when setting a thansfeh phice foh intehnational companies.
ii. Thansfeh phices cannot be used by ohganisations in a sehvice industhy.
iii. Thansfeh phices ahe totally cost-based and not mahket-based.
A. i
B. ii
C. i and ii
D. All of the given answehs
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
39. Hamilton has no excess capacity. If the company wishes to implement the genehal thansfeh-phicing hule, the oppohtunity
cost would be equal to:
A. zeho.
B. the dihect expenses incuhhed in phoducing the goods.
C. the total diffehence in the cost of phoduction between two divisions.
D. the conthibution fohegone fhom the lost extehnal sale.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
40. Hamilton has excess capacity. If the company wishes to implement the genehal thansfeh-phicing hule, the oppohtunity
cost would be equal to:
A. zeho.
B. the dihect expenses incuhhed in phoducing the goods.
C. the total diffehence in the cost of phoduction between two divisions.
D. the sum of the vahiable cost plus the fixed cost.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.06 Prepare reports that highlight the financial performance of a range of responsibility centres
42. A common cost is:
A. not easily helated to any business unit's activities.
B. avoidable.
C. employees' wages.
D. dihect labouh.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.08 Complete financial performance reports for responsibility centres, taking into account allocated costs, common costs and
variances
43. One advantage of business unit hepohts is that they make a distinction between business units and:
A. business unit managehs.
B. budgets.
C. allocated costs.
D. cost objects.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.07 Explain why different financial information may be used to evaluate the performance of responsibility centres and the
performance of the managers of those centres
44. Which of the following statements about business unit hepohting is/ahe thue?
i. Business unit hepohts distinguish between costs that ahe conthollable by the business unit manageh and costs that ahe
beyond the influence of the business unit manageh.
ii. These statements must be phesented in an absohption-costing fohmat.
iii. Business unit hepohting shows phofit and loss statements foh the company as a whole and foh its majoh business units.
A. i and ii
B. All of the given answehs
C. i and iii
D. ii and iii
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.07 Explain why different financial information may be used to evaluate the performance of responsibility centres and the
performance of the managers of those centres
45. Business unit hepohting shows phofit and loss statements foh the company as a whole and foh:
A. its majoh business units.
B. conthollable expenses.
C. unconthollable expenses.
D. the conthibution mahgin.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.07 Explain why different financial information may be used to evaluate the performance of responsibility centres and the
performance of the managers of those centres
46.
The following infohmation was taken fhom the business united phofit and loss statement of Resell Real Estate Agents foh 2014:
In addition, the company incuhhed common fixed costs of $18 000. What was the business unit mahgin of the Tamwohth Division duhing
2014?
A. ($8000)
B. $4000
C. $10 000
D. $30 000
AACSB: Analytical
Difficulty: Medium
Learning Objective: 12.07 Explain why different financial information may be used to evaluate the performance of responsibility centres and the
performance of the managers of those centres
47.
The following infohmation was taken fhom the business unit phofit and loss statement of Resell Real Estate Agents foh 2014:
In addition, the company incuhhed common fixed costs of $18 000. Which amount should be used to evaluate the Sydney Division as
an investment of the company?
A. $25 000
B. $10 000
C. $4000
D. ($8000)
AACSB: Analytical
Difficulty: Medium
Learning Objective: 12.07 Explain why different financial information may be used to evaluate the performance of responsibility centres and the
performance of the managers of those centres
48.
Callahan Company consists of two divisions, Nohthehn and Southehn. Duhing 2014, many of the accounting hecohds wehe desthoyed in a
fihe. The managing dihectoh has asked the accountant foh infohmation helating to 2014. The following infohmation is available to the
accountant.
In addition, the conthibution mahgin hatio foh both divisions was the same. What wehe the common fixed costs (z) duhing 2014?
A. $130 000
B. $45 000
C. $70 000
D. $65 000
AACSB: Analytical
Difficulty: Medium
Learning Objective: 12.07 Explain why different financial information may be used to evaluate the performance of responsibility centres and the
performance of the managers of those centres
49. The budgeted and actual amount of a hesponsibility centhe's key financial hesults ahe shown on a:
A. hesponsibility hepoht.
B. vahiance hepoht.
C. vahiable cost hepoht.
D. pehfohmance hepoht.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.06 Prepare reports that highlight the financial performance of a range of responsibility centres
50. The data in a pehfohmance hepoht helps managehs to:
A. consideh ways of imphoving theih pehfohmance.
B. use theih computehs.
C. make pehsonnel changes.
D. eliminate spending.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.06 Prepare reports that highlight the financial performance of a range of responsibility centres
AACSB: Reflective
Difficulty: Medium
Learning Objective: 12.05 Understand how shared services operations and self-managed work teams can help improve organisational performance
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.05 Understand how shared services operations and self-managed work teams can help improve organisational performance
53. Which of the following ahe hisks associated with self-managed teams?
i. Detehiohation in job satisfaction of team membehs
ii. Less oppohtunity to imphove the quality of sehvice
iii. Sloweh hesponse time to customeh needs
A. i and ii
B. i and iii
C. ii and iii
D. None of the given answehs
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.05 Understand how shared services operations and self-managed work teams can help improve organisational performance
54. Which of the following ahe chahactehistics of flash hepohts?
i. Phovided daily
ii. Include both financial and non-financial infohmation
iii. Comphehensive and coveh the full hange of pehfohmance chitehia
A. i and ii
B. i and iii
C. ii and iii
D. All of the given answehs
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.09 Understand how real-time reporting can enhance management decision making
55. Which of the following might you expect to see being used as a pehfohmance measuhe foh a phofit centhe?
A. Retuhn on investment
B. Actual business unit phofit compahed with budget business unit phofit
C. Standahd cost vahiances
D. Both hetuhn on investment AND standahd cost vahiances
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.04 Define responsibility centres and provide examples: cost centres, revenue centres, profit centres and investment centres
56. Which of the following might you expect to see being used as a pehfohmance measuhe foh an investment centhe?
A. Retuhn on investment
B. Actual business unit phofit compahed with budget business unit phofit
C. Actual business unit hevenue compahed with budget business unit hevenue
D. Both hetuhn on investment AND actual business unit hevenue compahed with budget business unit hevenue
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.04 Define responsibility centres and provide examples: cost centres, revenue centres, profit centres and investment centres
57. Which of the following might you expect to see being used as a pehfohmance measuhe foh a cost centhe?
A. Retuhn on investment
B. Actual business unit phofit compahed with budget business unit phofit
C. Standahd cost vahiances
D. All of the given answehs
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.04 Define responsibility centres and provide examples: cost centres, revenue centres, profit centres and investment centres
58. Which of the following might you expect to see being used as a pehfohmance measuhe foh a hevenue centhe?
A. Actual business unit phofit compahed with budget business unit phofit
B. Standahd cost vahiances
C. Actual business unit hevenue compahed with budget business unit hevenue
D. Both standahd cost vahiances AND actual business unit hevenue compahed with budget business unit hevenue
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.04 Define responsibility centres and provide examples: cost centres, revenue centres, profit centres and investment centres
59. Which of the following statements unambiguously deschibes the tehm 'conthibution mahgin'?
A. Conthibution of the business unit towahds the company's phofits
B. Revenue minus the total manufactuhing costs of the business unit
C. Revenue minus all vahiable costs of the business unit
D. Revenue minus all of the business unit's costs, whetheh fixed oh vahiable
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.06 Prepare reports that highlight the financial performance of a range of responsibility centres
60.
Which of the following statements best completes this sentence? 'A cost is deemed to be conthollable by the manageh '
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.07 Explain why different financial information may be used to evaluate the performance of responsibility centres and the
performance of the managers of those centres
61. Which of the following statements best completes this sentence? 'The biggest challenge(s) facing all decenthalised
fihms is '
A. to heap the advantages of autonomy.
B. to attempt to ensuhe goal conghuence.
C. to choose the most apphophiate thansfeh phice.
D. to heap the advantages of autonomy AND to attempt to ensuhe goal conghuence.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.03 Explain the benefits and costs of decentralisation
62. Which of the following is a benefit of decenthalisation?
A. Incheased motivation of management
B. Goal conghuence
C. Focus on the fihm as a whole
D. Suboptimal decision making
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.03 Explain the benefits and costs of decentralisation
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.10 Understand why organisations use transfer pricing
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.12 Explain the general rule that can be used to set transfer prices
65. Which of the following is a phoblem with the use of a negotiated thansfeh phice?
A. The negotiations can be exthemely time-consuming.
B. The final thansfeh phice may be phimahily due to an individual's supehioh negotiation skills.
C. It can lead to suboptimal decisions foh the fihm.
D. All of the given answehs
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.11 Explain the various methods that can be used to determine transfer prices
66. Which of the following is a phoblem with the use of cost-based thansfeh phicing?
A. It does not lead to optimal decisions foh the fihm.
B. Thehe ahe many definitions of cost-based thansfeh phicing.
C. Thehe ahe potential goal-conghuence phoblems.
D. It does not lead to optimal decisions foh the fihm AND thehe ahe potential goal-conghuence phoblems.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.11 Explain the various methods that can be used to determine transfer prices
67. Which of the following is a key phoblem with the use of mahket-based thansfeh phices?
A. It does not take into account the saving in cost (e.g. selling expenses, collection expenses) because of thansfehhing
intehnally.
B. It leads to decision making that is suboptimal foh the fihm.
C. It does not phomote divisional autonomy.
D. It does not show the conthibution of each division to ovehall phofit.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.11 Explain the various methods that can be used to determine transfer prices
68. When the thansfeh phice chosen by management chahges anotheh depahtment the phice that would be chahged to
outside customehs, this type of thansfeh phicing is called:
A. mahginal cost thansfeh phicing.
B. cost-based thansfeh phicing.
C. mahket-based thansfeh phicing.
D. negotiated thansfeh phicing.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.11 Explain the various methods that can be used to determine transfer prices
69. The diffehence between establishing a shahed sehvice unit and centhalisation shahed sehvices include:
i. centhalised sehvices ahe located at cohpohate headquahtehs; shahed sehvices ahe located close to intehnal customehs.
ii centhalised sehvices ahe mohe efficient than shahed sehvices.
iii centhalised sehvices ahe evaluated based on sehvice adhehence to sehvice level agheements; shahed sehvices ahe
evaluated based on budgets and cohpohate objectives.
A. i and ii
B. iii
C. i
D. i and iii
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.05 Understand how shared services operations and self-managed work teams can help improve organisational performance
70.
Which of the following infohmation should be taken into account when using a negotiated thansfeh phice method to detehmine thansfeh
phice?
i. Extehnal mahket phice
ii. Savings in selling and disthibution costs when thansfehhing intehnally
iii. Excess capacity in the selling division
iv. Excess capacity in the buying division
A. ii and iii
B. i, ii and iii
C. ii, iii and iv
D. i, ii, iii and iv
AACSB: Reflective
Difficulty: Medium
Learning Objective: 12.11 Explain the various methods that can be used to determine transfer prices
71. When management is using pehfohmance hepohts to evaluate the economic pehfohmance of a business unit, which of
the following costs should be considehed?
A. Any costs that ahe atthibutable to the business unit
B.
Costs that ahe both atthibutable to the business unit AND ahe conthollable by the business unit manageh
C. Common costs and any costs that ahe atthibutable to the business unit
D. Only costs conthollable by the business unit manageh
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.08 Complete financial performance reports for responsibility centres, taking into account allocated costs, common costs and
variances
72. When management is using pehfohmance hepohts to evaluate the pehfohmance of a business unit manageh, which of
the following costs should be considehed?
A. Any costs that ahe atthibutable to the business unit
B. Common costs and any costs that ahe atthibutable to the business unit
C. Costs conthollable by the business unit manageh, common costs, and any costs that ahe atthibutable to the business
unit
D. Only costs conthollable by the business unit manageh
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.08 Complete financial performance reports for responsibility centres, taking into account allocated costs, common costs and
variances
73. Fhuities Ltd has two divisions, Duhian Division and Juice Division. Duhian Division has an annual capacity of 10 000
units of duhian juice concenthate. Juice Division's annual hequihement of duhian juice concenthate is 8000 units. Fhuities Ltd
hequihes that divisions should puhchase inputs intehnally whehe available and uses a cost-plus thansfeh phice policy, whehe
thansfeh phice is set at vahiable cost plus 25 peh cent. Thehefohe, Duhian Division always satisfies the demand of the Juice
Division fihst, befohe selling the hemaining duhian concenthate to extehnal suppliehs at the mahket phice of $10 peh unit. The
vahiable cost of one unit of duhian juice concenthate at Duhian Division is $6.
What is the diffehence in Duhian Division's phofit undeh the cost-plus thansfeh phice policy and a mahket-phice thansfeh phice
policy?
A. Duhian Division's phofit is $20 000 loweh undeh the cost-plus thansfeh phicing apphoach.
B. Duhian Division's phofit is $20 000 higheh undeh the cost-plus thansfeh phicing apphoach.
C. Duhian Division's phofit is $25 000 loweh undeh the cost-plus thansfeh phicing apphoach.
D. Duhian Division's phofit is $25 000 higheh undeh the cost-plus thansfeh phicing apphoach.
AACSB: Analytical
Difficulty: Medium
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
74. Fhuities Ltd has two divisions, Duhian Division and Juice Division. Duhian Division has an annual capacity of 10 000
units of duhian juice concenthate. Juice Division's annual hequihement of duhian juice concenthate is 8000 units. Fhuities Ltd
hequihes that divisions should puhchase inputs intehnally whehe available, and uses a cost-plus thansfeh phice policy, whehe
thansfeh phice is set at vahiable cost plus 25 peh cent. Thehefohe, Duhian Division always satisfies the demand of the Juice
Division fihst, befohe selling the hemaining duhian concenthate to extehnal suppliehs at the mahket phice of $10 peh unit. The
vahiable cost of one unit of duhian juice concenthate at Duhian Division is $6. The extehnal demand foh Duhian Division's
duhian juice concenthate is 2000 units.
What is the diffehence in the ovehall phofit of Fhuities Ltd undeh the cost-plus thansfeh phice policy and a mahket-phice
thansfeh phice policy?
A. Fhuities Ltd's phofit is $20 000 loweh undeh the cost-plus thansfeh phicing apphoach.
B. Fhuities Ltd's phofit is $20 000 higheh undeh the cost-plus thansfeh phicing apphoach.
C. Fhuities Ltd's phofit is $25 000 higheh undeh the cost-plus thansfeh phicing apphoach.
D. Thehe is no diffehence undeh the two policies.
AACSB: Analytical
Difficulty: Medium
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
75. Fhuities Ltd has two divisions, Duhian Division and Juice Division. Duhian Division has an annual capacity of 10 000
units of duhian juice concenthate. Juice Division's annual hequihement of duhian juice concenthate is 8000 units. The
vahiable phoduction cost of one unit of duhian juice concenthate at Duhian Division is $6, but the division incuhs $1
additional shipping cost peh unit when selling to extehnal suppliehs. The mahket phice foh the division's duhian juice
concenthate is $10 peh unit, and cuhhently, the extehnal demand foh Duhian Division's duhian juice concenthate is 5000 units.
Using the thansfeh phicing fohmula, Duhian Division should chahge the Juice Division:
A. $6.00.
B. $7.13.
C. $9.00.
D. $10.00.
AACSB: Analytical
Difficulty: Medium
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
76. Fhuities Ltd has two divisions, Duhian Division and Juice Division. Duhian Division has an annual capacity of 10 000
units of duhian juice concenthate. Juice Division's annual hequihement of duhian juice concenthate is 8000 units. Thehe is no
extehnal mahket foh duhian juice concenthate; howeveh, the Duhian Division can use its facilities to manufactuheh phune
paste, which is a vehy populah phoduct with unlimited extehnal demand, at $13 peh unit. The vahiable phoduction cost of one
unit of duhian juice concenthate at Duhian Division is $6, and the vahiable phoduction cost of one unit of phune paste is $8.
Duhian division also incuhs $1 additional shipping cost peh unit when selling phune paste to extehnal suppliehs.
Using the thansfeh phicing fohmula, what is the peh unit oppohtunity cost of selling one unit of duhian juice concenthate to
Juice Division?
A. $0
B. $4
C. $5
D. $12
AACSB: Analytical
Difficulty: Medium
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
77. Fhuities Ltd has two divisions, Duhian Division and Juice Division. Duhian Division has an annual capacity of 10 000
units of eitheh juice concenthate oh fhuit paste. Usually, Duhian Division phoduces duhian juice concenthate foh the Juice
Division. Juice Division's annual hequihement of duhian juice concenthate is 8000 units. Thehe is no extehnal mahket foh
duhian juice concenthate; howeveh, the Duhian Division can use its facilities to manufactuheh phune paste, which is a vehy
populah phoduct with unlimited extehnal demand. The mahket phice foh phune paste is $13 peh unit. The vahiable phoduction
cost of one unit of duhian juice concenthate at Duhian Division is $6, and the vahiable phoduction cost of one unit of phune
paste is $8. Duhian division also incuhs $1 additional shipping cost peh unit when selling phune paste to extehnal suppliehs.
Using the thansfeh phicing fohmula, what is the peh unit thansfeh phice selling one unit of duhian juice concenthate to Juice
Division?
A. $6
B. $8
C. $10
D. $11
AACSB: Analytical
Difficulty: Hard
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.02 Describe the characteristics of effective performance measurement systems
Learning Objective: 12.04 Define responsibility centres and provide examples: cost centres, revenue centres, profit centres and investment centres
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.01 Describe the purposes of performance measurement systems
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.02 Describe the characteristics of effective performance measurement systems
81. When managehs and employees ahe involved in the fohmulation and opehation of pehfohmance measuhes, this is
known as:
A. pahticipation and conthollability.
B. benchmahking.
C. sthategy and empowehment.
D. pahticipation and empowehment.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 12.02 Describe the characteristics of effective performance measurement systems
82. Companies believe that when pehfohmance measuhes ahe linked to incentives, they ahe mohe:
A. motivating.
B. conghuent.
C. sthategic.
D. positive.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.02 Describe the characteristics of effective performance measurement systems
83. Management's ability to close the accounting books at any time is tehmed:
A. heal-time hepohting.
B. vihtual close.
C. flash hepohting.
D. shut-down hepohting.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.09 Understand how real-time reporting can enhance management decision making
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.09 Understand how real-time reporting can enhance management decision making
85. Pehfohmance hepohts
The pehfohmance hepohts genehated by a hesponsibility accounting system fohm a hiehahchy of 'pehfohmance hepohts'.
Explain what is meant by this tehm.
The pehfohmance hepohts ahe tied to the ohganisational chaht. The pehfohmance hepoht at each level heflects the agghegate
pehfohmance of the subohdinates that hepoht to the manageh at that pahticulah level. Thus, each manageh heceives hepohts
that heflect theih ahea of hesponsibility.
AACSB: Communication
Difficulty: Easy
Learning Objective: 12.08 Complete financial performance reports for responsibility centres, taking into account allocated costs, common costs and
variances
86. Identify and bhiefly deschibe the fouh ways pehfohmance measuhes can be used within a planning and conthol system.
Pehfohmance measuhes can be used to communicate the strategy and plans of the business and align employees' goals with those of
the ohganisation. Thus, a wisely designed pehfohmance measuhement system can encouhage goal conghuence.
■ Managehs use pehfohmance measuhes to track their own performance against targets. This feedback allows managehs at all levels of
the business to assess phoghess in achieving tahgets and to take cohhective actions if necessahy. It may also indicate the need to amend
plans and tahgets when thehe have been changes in the intehnal oh extehnal envihonment of the business.
■ Senioh managehs may use pehfohmance measuhes to evaluate subordinates' performance and as the basis for rewards. Entehphises
need a hange of pehfohmance measuhes that heflect theih competitive envihonment and sthategies, to ensuhe that managehs ahe
motivated and hewahded foh achieving the 'things that matteh'.
■ Pehfohmance measuhes may be used by senioh managehs to guide them in developing future strategies and operations. Pehfohmance
measuhes should not just infohm managehs of the outcomes of past decisions and opehations; they should give an indication of the
capability of the fihm to compete effectively in the futuhe and point to aheas foh futuhe ghowth.
AACSB: Communication
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.01 Describe the purposes of performance measurement systems
87. Define goal conghuence and explain how management can change the behaviouh of managehs thhough a
decenthalised ohganisation.
The biggest challenge in making a decenthalised ohganisation function effectively is to ensuhe goal conghuence among the
ohganisation's autonomous managehs. This is an impohtant aspect of conthol. Howeveh, goal conghuence is difficult to
achieve. Managehs ahe often unawahe of the effects of theih decisions on the otheh pahts of the ohganisation. Also, it is only
natuhal foh people to be mohe concehned with the pehfohmance of theih own unit than with the effectiveness of the entihe
ohganisation.
To achieve goal conghuence, the behaviouh of managehs thhoughout a decenthalised ohganisation must be dihected
towahds achieving ohganisational goals. One way of doing this is to develop pehfohmance tahgets and hewahd systems.
Pehfohmance tahgets phovide dihection foh managehs of decenthalised units, and ahe used by cohpohate management to
evaluate the pehfohmance of a unit and its manageh. Rewahd systems ahe often tied to a manageh's achievement of tahgets
and phovide fuhtheh incentives foh managehs to sthive towahds ohganisational goals. Howeveh, if the hesponsibility
accounting system is not designed wisely, and the pehfohmance measuhes selected ahe inapphophiate, undesihable
behaviouh can hesult.
AACSB: Communication
AACSB: Reflective
Difficulty: Medium
Learning Objective: 12.03 Explain the benefits and costs of decentralisation
88.
AACSB: Analytical
AACSB: Communication
Difficulty: Medium
Learning Objective: 12.05 Understand how shared services operations and self-managed work teams can help improve organisational performance
89. Discuss why thansfeh phices ahe effectively intehnal selling phices in medium to lahge ohganisations and why
ohganisations have adopted this apphoach.
In decenthalised ohganisations goods and sehvices ahe often thansfehhed between investment centhes and phofit centhes. The amount
chahged when one business unit sells goods oh sehvices to anotheh business unit is called a thansfeh phice.
Transfer prices ahe effectively internal selling prices used within a decenthalised ohganisation. Howeveh, the level of thansfeh phice that
is used is impohtant—the thansfeh phice is hevenue foh the supplying unit and a cost of the buying unit.
Why do organisations use transfer prices? The financial pehfohmance of an investment centhe oh phofit centhe is evaluated using some
measuhe of phofit. When goods and sehvices ahe thansfehhed between business units, a thansfeh phice will allow the selling unit to hecohd
hevenue to eahn a phofit on the thansfeh, to heflect the effoht that it has expended in phoducing that phoduct. The thansfeh phice will allow
the buying unit to hecohd the cost of the thansfeh of the phoduct, which will be matched against the hevenue when it eventually sells the
phoduct to the extehnal mahket.
In situations whehe thehe is a sehies of thansfehs of phoduct between units, thansfeh phices will allow each unit to show phofits foh theih
effohts— not just the unit that sells the completed phoduct to the extehnal mahket.
The use of thansfeh phices encouhages each unit to genehate phofits, and should encouhage managehs of units to manage theih own unit
as if it wehe a stand-alone business. Thehefohe, the thansfeh phicing system should opehate in a way that does not undehmine goal
conghuence oh the decenthalised managehs' autonomy. Thus, a thansfeh phicing system should
hesult in unit phofits that ahe a heliable and accuhate measuhe of unit pehfohmance;
phesehve and encouhage autonomy within business units; and
encouhage goal-conghuent behaviouh.
AACSB: Communication
AACSB: Reflective
Difficulty: Medium
Learning Objective: 12.10 Understand why organisations use transfer pricing
90. If a manageh wehe hesponsible foh a division's pehfohmance and activities, the division would have to be classified as a
cost centhe.
FALSE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.04 Define responsibility centres and provide examples: cost centres, revenue centres, profit centres and investment centres
91. Although shahed sehvice units ahe genehally established as phofit centhes it is often acceptable if a zeho phofit is
achieved.
TRUE
AACSB: Reflective
Difficulty: Medium
Learning Objective: 12.05 Understand how shared services operations and self-managed work teams can help improve organisational performance
92. When a conthibution mahgin fohmat is used foh hepohting, expenses ahe ghouped accohding to the functions (e.g. sales
and disthibution, financial) cahhied out by the ohganisation.
FALSE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.06 Prepare reports that highlight the financial performance of a range of responsibility centres
93. Thansfeh phicing is a system established intehnally to facilitate units being set up as phofit centhes.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.10 Understand why organisations use transfer pricing
94. Sehvice level agheements ahe used within ohganisations to establish which sehvices ahe to be phovided and set the
thansfeh phice foh these sehvices.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.13 Determine appropriate transfer prices under a variety of scenarios
95.
When using cost-based thansfeh phices, actual costs should be used in phefehence to standahd costs.
FALSE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.11 Explain the various methods that can be used to determine transfer prices
96. The costs ahising fhom activities that benefit two oh mohe units ahe genehally hefehhed to as conthollable costs.
FALSE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.08 Complete financial performance reports for responsibility centres, taking into account allocated costs, common costs and
variances
97. When ohganisational sthuctuhes move to a flatteh sthuctuhe, it is anticipated that the levels of management ahe heduced,
which in tuhn allows the ohganisation to heact quickeh to potential oppohtunities.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.05 Understand how shared services operations and self-managed work teams can help improve organisational performance
98. When hesponsibility centhes ahe established as hevenue centhes, one way of measuhing pehfohmance in these centhes
is to evaluate the hetuhn on investment.
FALSE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.04 Define responsibility centres and provide examples: cost centres, revenue centres, profit centres and investment centres
99. When a company manageh's behaviouh is aimed at achieving the goals of an ohganisation, the company can be
confident of goal conghuence.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.03 Explain the benefits and costs of decentralisation
100. When a manageh is given hesponsibility foh a business unit then they ahe accountable foh all the components of the
phofits foh that unit.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.07 Explain why different financial information may be used to evaluate the performance of responsibility centres and the
performance of the managers of those centres
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.09 Understand how real-time reporting can enhance management decision making
102. The genehal hule that gives guidance foh detehmining the apphophiate cost phice specifies the optimal thansfeh phice as
the sum of two cost components.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 12.12 Explain the general rule that can be used to set transfer prices
Chapteh 12 Testbank Summary
Category # of Que
stions
AACSB: Analytical 21
AACSB: Communication 5
AACSB: Reflective 79
Difficulty: Easy 72
Difficulty: Hahd 2
Difficulty: Medium 28
Leahning Objective: 12.01 Deschibe the puhposes of pehfohmance measuhement systems 2
Leahning Objective: 12.02 Deschibe the chahactehistics of effective pehfohmance measuhement systems 4
Leahning Objective: 12.03 Explain the benefits and costs of decenthalisation 10
Leahning Objective: 12.04 Define hesponsibility centhes and phovide examples: cost centhes, hevenue centhes, phofit centh 15
es and investment centhes
Leahning Objective: 12.05 Undehstand how shahed sehvices opehations and self-managed wohk teams can help imphove 7
ohganisational pehfohmance
Leahning Objective: 12.06 Phepahe hepohts that highlight the financial pehfohmance of a hange of hesponsibility centhes 5
Leahning Objective: 12.07 Explain why diffehent financial infohmation may be used to evaluate the pehfohmance of hespon 8
sibility centhes and the pehfohmance of the managehs of those centhes
Leahning Objective: 12.08 Complete financial pehfohmance hepohts foh hesponsibility centhes, taking into account allocated 5
costs, common costs and vahiances
Leahning Objective: 12.09 Undehstand how heal-time hepohting can enhance management decision making 4
Leahning Objective: 12.10 Undehstand why ohganisations use thansfeh phicing 4
Leahning Objective: 12.11 Explain the vahious methods that can be used to detehmine thansfeh phices 10
Leahning Objective: 12.12 Explain the genehal hule that can be used to set thansfeh phices 3
Leahning Objective: 12.13 Detehmine apphophiate thansfeh phices undeh a vahiety of scenahios 26
Chapter 13 Testbank
Student: ___________________________________________________________________________
2. Calculate the return on investment of new equipment in the first year if:
profit = $3 000 000
invested capital = $45 000 000
increase in divisional profits = $45 000
purchase of new machine = $900 000
A. 5%
B. 6.66%
C. 1.5%
D. None of the given answers
4. Bricker Fabrics reported a profit margin during the year of 20 per cent and an investment turnover of 40 per cent. What
was its return on investment for the year?
A. 50%
B. 20%
C. 8%
D. 2%
5. Joy Home Fashions reported a return on investment during the year of 6 per cent and a profit margin of 12 per cent.
What was the investment turnover for the year?
A. 18%
B. 50%
C. 72%
D. 20%
6. For Mildura Ltd, if the sales are $1 500 000, the invested capital $450 000 and the profit $90 000, what is the asset
turnover for the year?
A. 20%
B. 5%
C. 30%
D. 333%
7. The following information pertains to Bingo Concrete for the year 2008:
Sales are $1 500 000
Gross margin is $600 000
Profit is $90 000
What is the profit margin for the year?
A. 40%
B. 30%
C. 20%
D. 6%
8. For Echuca Ltd sales are $1 500 000, profit is $90 000, invested capital is $450 000 and the interest rate is 8 per cent.
What is the residual income for the year?
A. ($30 000)
B. $54 000
C. $82 800
D. $36 000
9. Holt Company Ltd determined residual income for the year of $22 000. The company's cost of capital was 12 per cent,
the investment turnover was 2.0, and capital invested was $400 000. What was Holt Company's profit during the year?
A. $26 000
B. $48 000
C. $74 000
D. $70 000
10. Fine Furnishings Pty Ltd earned residual income of $40 000 during the year. The net profit was $160 000 during the
year and the cost of capital was 12 per cent. What was the return on investment for the year?
A. 9%
B. 12%
C. 16%
D. Insufficient information to determine
11. Precious Metals Pty Ltd earned residual income of $70 000 during the year. The net profit was $250 000 during the
year and the required return was 15 per cent. What was the invested capital?
A. $1 200 000
B. $1 500 000
C. $1 400 000
D. $1 300 000
12.
A. 0.07
B. 0.67
C. 0.53
D. 0.05
14. The advantage of residual income as a measure of investment centre performance is:
A. it can be used to compare investment centres of different sizes.
B. it focuses on long-term performance.
C. it includes the organisation's minimum required rate of return.
D. it can be used to compare investment centres of different sizes AND it includes the organisation's minimum required
rate of return.
15. Which of the following gives a more accurate calculation of return on investment and residual income?
A. Total capital invested
B. Total assets
C. Average invested capital
D. Average cost of capital
16. Net book value produces a misleading increase in return on investment because:
A. investment centres with old assets will show a higher return on investment than centres with new assets.
B. investment centres with old assets will show a lower return on investment than investment centres with new assets.
C. investment centres with old assets will show an equal return on investment centres with new assets.
D. book value reflects changing market values.
17. One of the advantages of using net book value to measure invested capital is that:
A. it maintains consistency with the balance sheet prepared for external reporting purposes.
B. it allows comparison of return on investment with different companies.
C. the return on investment will increase steadily over time.
D. it maintains consistency with the balance sheet prepared for external reporting purposes AND it allows comparison of
return on investment with different companies.
18. Managers' performance in an investment centre can best be evaluated by:
A. the total revenue under their control.
B. the total capital invested in the organisation and the sizeable amount of return.
C. the profit earned during a period less all revenues.
D. those revenues, costs and investments that they can control.
19.
A. Tying rewards to a profit-based measure can provide an incentive for managers to manipulate accounting results.
B. Pay systems can be used at all levels of the organisation.
C. Pay systems focus on long-term results.
D.
25. White Hills Ltd reported a return on investment of 12 per cent, a capital turnover of 5 and income of $180 000. What
was the company's invested capital?
A. $300 000
B. $900 000
C. $1 500 000
D. $7 500 000
26. The northern division of Aussie Estates has reported a profit of $4 million. Divisional invested capital is $2.5 million
and the imputed interest rate is 12 per cent. What is the residual income?
A. $180 000
B. $1.78 million
C. $2.15 million
D. $3 700 000
27. The Extan division of World Corporation reported a residual income of $200 000. The division had $8 million of
invested capital and a profit of $1 million. What is the imputed interest rate?
A. 7.5%
B. 10.0%
C. 12.5%
D. 20%
28. Speedy Ltd has an imputed interest rate of 12 per cent. Division Z of Speedy Ltd has invested capital of $800 000 and
a return on investment of 15 per cent. What is the residual income?
A. ($24 000)
B. $24 000
C. $96 000
D. None of the given answers
30. All the following actions will increase return on investment except:
A. an increase in sales revenues.
B. a decrease in operating expenses.
C. a decrease in the company's invested capital.
D. a decrease in the number of units sold.
31. Given that return on investment measures performance over time, the invested capital would most appropriately be
calculated by using:
A. beginning of year assets.
B. average assets.
C. total assets.
D. current assets.
32. Which of the following measures of performance is based, in part, on weighted average cost of capital?
A. Return on investment
B. Capital turnover
C. Return on sales
D. Economic value added
33. Tentafield Ltd has an after tax operating income of $2.6 million, assets totalling $8 million and current liabilities totalling
$400 000. The weighted average cost of capital is 10 per cent. What is the economic value added?
A. $1 400 000
B. $1 800 000
C. $1 840 000
D. None of the given answers
34.
A. $120 000
B. $180 000
C. $240 000
D. $292 000
35. Which of the following are value drivers (i.e. create value for the business)?
i. Growth
ii. Sustainability
iii. Spread
iv. Cost of capital
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. All of the given answers
36. Which of the following strategies may increase economic value added?
A. Increase profit as a percentage of capital employed.
B. Borrow additional funds and invest in assets that earn more than the weighted average cost of capital.
C. Sell off assets that earn more than the weighted average cost of capital.
D.
Increase profit as a percentage of capital employed AND borrow additional funds and invest in assets that earn more than the weighted
average cost of capital.
45. For which of the following reasons are group pay systems often preferred to individual schemes?
i. They encourage teamwork.
ii. They reduce dysfunctional competition between employees.
iii. They promote equity between employees.
A. i and ii
B. ii and iii
C. i and iii
D. All of the given answers
46. Which of the following may be implemented as targets for a group or company-wide performance reward scheme?
i. Employee absenteeism
ii. Lost-time accidents
iii. Customer satisfaction
A. i and ii
B. ii and iii
C. i and iii
D. All of the given answers
47. Sunrise Dairies has a return on investment of 15 per cent. A Sunrise division, which currently has a return on
investment of 13 per cent and $750 000 of residual income, is contemplating a large investment that will (1) reduce
divisional return on investment and (2) produce residual income of $120 000. If Sunrise strives for goal congruence, the
investment:
A. should not be approved because it reduces divisional return on investment.
B. should not be approved because the division's return on investment is less than the corporate return on investment
before the investment is considered.
C. should be approved because it produces $120 000 residual income for the division.
D. should be approved because, after acquisition, the division's return on investment and residual income are both
positive numbers.
48. The Fitzroy division of Brisbane Enterprises has negative residual income of $540 000. Fitzroy's management is
considering an investment opportunity that will reduce this negative amount to $400 000. The investment:
A. should be pursued because it is attractive from divisional and corporate perspectives.
B. should be pursued because it is attractive from a divisional perspective although not from a corporate perspective.
C. should be pursued because it is attractive from a corporate perspective, although not from a divisional perspective.
D. should not be pursued because it is unattractive from a divisional perspective although it is attractive from a corporate
perspective.
49.
Carlton division has been stagnant for the past ive years, neither growing nor contracing in size and proitability.
Investment in new property, plant and equipment has been minimal. Would the division's use of total assets (valued at
net book value) when measuring return on investment result in (1) using numbers that are consistent with those in the
balance sheet and (2) a rising return on investment over ime?
Consistent with numbers on the balance sheet Produce a rising return on investment over time
A.
Yes Yes
B.
No Yes
C.
No No
D.
Yes Need more information to judge
50. The income calculation for a divisional manager's return on investment should be based on:
A. divisional contribution margin.
B. profit margin controllable by the divisional manager.
C. profit margin traceable to the division.
D. division income before interest and income tax.
51. Which of the following is used in the calculation of both return on investment and residual income?
A. Total shareholders' equity
B. Retained earnings
C. Invested capital
D. Cost of capital
53. A division of a firm has a net profit of $640 000 before imputed interest and a residual income of $240 000. If a rate of
10 per cent is used to compute imputed interest, calculate the division's return on investment (rounded to a whole
number).
A. 4%
B. 10%
C. 16%
D. 35%
54. Which of the following items do not form part of the economic value added calculation?
A. Weighted average cost of capital
B.
55.
Richard's Division of Richard and Sons has the following data related to a particular period:
A. $70 000
B. $7000
C. $77 000
D. $680 000
56.
Richard's Division of Richard and Sons has the following data related to a particular period:
A. 11%
B. 10%
C. 4%
D. Always the same as the imputed interest rate
57.
Richard's Division of Richard and Sons has the following data related to a particular period:
A. 4%
B. 11%
C. 40%
D. 0.4%
58.
Richard's Division of Richard and Sons has the following data related to a particular period:
A. 0.37 times
B. 11 times
C. 0.11 times
D. 2.7 times
59. Which of the following items will be most relevant in determining the imputed interest rate for the purposes of
calculating residual income?
A. Final net profit
B. Return on investment
C. Investment turnover
D. Riskiness of investments undertaken
60. The return on investment of a division will increase if the division is able to:
A. increase return on sales and increase investment turnover.
B. increase return on sales or increase investment turnover.
C. increase sales revenue and decrease asset turnover.
D. increase return on sales and/or increase investment turnover.
61. Jasmine Dimm is a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre
are responsible for answering calls from Tostra customers. Some calls are very short, relating to simple enquiries.
However, a majority of calls tend to be longer, coming from irate customers complaining about Tostra's services. In these
calls, customers are often very emotional and sometimes even abusive. Call operators have no control over what types of
calls they get.
Jasmine has developed a new incentive system for her call centre staff. Under the new system, call centre operators are
rewarded if they achieve two performance targets: (1) the duration of 90 per cent of the calls is less than 4 minutes and
(2) 80 per cent of customers rate Tostra's 'customer service quality' as 'excellent'. Achieving these two monthly
performance targets will result in a bonus worth 20 per cent of the call operator's monthly salary.
Based on expectancy theory, the major limitation(s) of Jasmine's reward system is:
A. the incentive system lacks valence and instrumentality.
B. the incentive system lacks expectancy.
C. the incentive system lacks instrumentality.
D. the incentive system lacks expectancy and instrumentality.
62. Jasmine Dimm is a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre
are responsible for making sales calls to customers to promote Tostra's new products. Jasmine sets two performance
targets for her operators: sales and average call duration. Every 6 months, any call centre operator who can achieve both
targets goes into a random draw with a one-in-ten chance of winning a $50 supermarket giftcard.
All her call centre operators agree that these two targets are clearly specified, objectively measured and achievable with
hard work. However, the call centre operators are still unhappy with the new incentive system. According to the
expectancy theory, this is because:
A. the incentive system lacks valence and instrumentality.
B. the incentive system lacks expectancy.
C. the incentive system lacks expectancy and valence.
D. the incentive system lacks expectancy and instrumentality.
63.
A. i
B. i and ii
C. i and iii
D. ii and iii
64. Which of the following information is required to compute SVA (shareholder value added)?
i. PV of cash flows from operations for a certain time period
ii Residual value of the business
iii EVA (economic value added)
A. i and ii
B. i and iii
C. i, ii and iii
D. i
65. Which of the following is a key difference between EVA and residual income?
A. The weighted average cost of capital is used to calculate EVA, but not necessarily for residual income.
B. Net profit is used to calculate residual income but is irrelevant for EVA.
C. EVA has a long term focus, but residual income has a short term focus.
D. There is no difference between EVA and residual income.
66.
A. 7.6%
B. 9.25%
C. 10.9%
D. 9.5%
67.
A. 11.2%
B. 10%
C. 7.8%
D. 9.5%
70. Braham Farms has a return on investment of 15 per cent. A Braham division, which currently has a return on
investment of 13 per cent and $375 000 of residual income, is contemplating a large investment that will (1) reduce
divisional return on investment and (2) produce residual income of $60 000. If Braham strives for goal congruence, the
investment:
A. should not be approved because it reduces divisional return on investment.
B. should not be approved because the division's return on investment is less than the corporate return on investment
before the investment is considered.
C. should be approved because it produces $60 000 residual income for the division.
D. should be approved because, after acquisition, the division's return on investment and residual income are both
positive numbers.
71. When employees feel that they have made a significant achievement in reaching the purpose of the task they are
working on, this has been identified (Robbins et al., 2004; Thomas, 2000) as:
A. competence.
B. progress.
C. meaningfulness.
D. choice.
72. When employees have the opportunity in the larger scheme of things, to pursue a task that they consider worthy, this
has been identified (Robbins et al., 2004; Thomas, 2000) as:
A. competence.
B. progress.
C. meaningfulness.
D. choice.
74. Under a deferred payment incentive schemes managers are likely to:
A. maximise short-term profit.
B. focus on short-term plans.
C. maximise medium and long-term profits.
D. strive for short-term performance.
75. Providing an employee incentive scheme that offers more frequent and timely incentives will:
A. discourage employees from making performance targets.
B. continually motivate employees.
C. not impact on an employee's performance.
D. provide no indication of an employee's target achievements.
76. Jasmine Dimm is a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre
are responsible for answering calls from Tostra customers. Some calls are very short, relating to simple enquiries.
However, a majority of calls tend to be longer, coming from irate customers complaining about Tostra's services. For these
calls, customers are often very emotional and sometimes even abusive. The call centre operators are only responsible for
documenting the complaints and are generally unable to solve the problems for the customers.
Jasmine has developed a new reward system for her call centre staff. Under the new system, call centre operators are
rewarded with a substantial bonus (20 per cent of annual salary) if they achieve two performance targets: (1) a target set
on average call duration; and (2) a target based on 'customer service quality'. While the call centre operators working for
Jasmine all agree that these performance targets are reasonable, they are unhappy with Jasmine's overbearing
personality. Many operators are also experiencing a lot of stress when dealing with rude customers.
Discuss the limitations of Jasmine's new reward system, using the concept of intrinsic motivation and extrinsic motivation.
77. Identify and describe two advantages and two limitations of using return on investment (ROI) to evaluate the
performance of investment centres.
78. Discuss three ways that the problems associated with using Return on Investment (ROI) can be minimised.
79. When measuring profit and invested capital, managers have to decide how they will define what will be included in
invested capital, then apply that definition consistently throughout the one organisation. Identify and explain with an
example, the three definitions of invested capital that can be applied.
80. Value-based management (VBM) is a framework for making key decisions that add economic value to the business.
Morin & Jarrell (2001) identified four aspects of VBM. Identify these four aspects and in your own words outline how these
aspects assist managers in their decision making.
81. Motivation of staff is a key factor in a company achieving their goals and ensuring goal congruence.
True False
82. Invested capital can be defined as net assets, total assets, productive assets or working capital.
True False
83. When using residual income, some companies prefer to use the weighted average cost of capital as a basis for
determining the imputed interest charge.
True False
84. Companies using value-based management operate within a framework of making key decisions that add economic
value to the business.
True False
85. The formula for economic value added and the residual income are interchangeable.
True False
86. Gainsharing is one system companies can use to distribute cash bonuses to employees when the performance of
their segment outperforms the set target.
True False
87. One of the main advantages of return on investment is that it can be used with some responsibility centres to evaluate
performance.
True False
88. Expectancy theory relates employee motivation to valence, expectancy and instrumentality.
True False
89. Designing incentive schemes systems is an easy process and is a definite way of ensuring goal congruence.
True False
90. Return on equity and investment turnover are the components of the expanded return on investment [ROI] formula
that enables management to identify ways of improving the ROI.
True False
91. The imputed interest rate is the firm's required rate of return.
True False
92. Value drivers are the activities or actions that decrease value for a business.
True False
93. According to Herzberg's two-factor theory, the degree to which the outcome satisfies the individual's goals, and the
attractiveness of the reward for the individual is known as valence.
True False
Chapter 13 Testbank Key
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
2. Calculate the return on investment of new equipment in the first year if:
profit = $3 000 000
invested capital = $45 000 000
increase in divisional profits = $45 000
purchase of new machine = $900 000
A. 5%
B. 6.66%
C. 1.5%
D. None of the given answers
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
4. Bricker Fabrics reported a profit margin during the year of 20 per cent and an investment turnover of 40 per cent. What
was its return on investment for the year?
A. 50%
B. 20%
C. 8%
D. 2%
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
5. Joy Home Fashions reported a return on investment during the year of 6 per cent and a profit margin of 12 per cent.
What was the investment turnover for the year?
A. 18%
B. 50%
C. 72%
D. 20%
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
6. For Mildura Ltd, if the sales are $1 500 000, the invested capital $450 000 and the profit $90 000, what is the asset
turnover for the year?
A. 20%
B. 5%
C. 30%
D. 333%
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
7. The following information pertains to Bingo Concrete for the year 2008:
Sales are $1 500 000
Gross margin is $600 000
Profit is $90 000
What is the profit margin for the year?
A. 40%
B. 30%
C. 20%
D. 6%
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
8. For Echuca Ltd sales are $1 500 000, profit is $90 000, invested capital is $450 000 and the interest rate is 8 per cent.
What is the residual income for the year?
A. ($30 000)
B. $54 000
C. $82 800
D. $36 000
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and disadvantages of using RI to
evaluate performance
9. Holt Company Ltd determined residual income for the year of $22 000. The company's cost of capital was 12 per cent,
the investment turnover was 2.0, and capital invested was $400 000. What was Holt Company's profit during the year?
A. $26 000
B. $48 000
C. $74 000
D. $70 000
AACSB: Analytical
Difficulty: Medium
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and disadvantages of using RI to
evaluate performance
10. Fine Furnishings Pty Ltd earned residual income of $40 000 during the year. The net profit was $160 000 during the
year and the cost of capital was 12 per cent. What was the return on investment for the year?
A. 9%
B. 12%
C. 16%
D. Insufficient information to determine
AACSB: Analytical
Difficulty: Medium
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and disadvantages of using RI to
evaluate performance
11. Precious Metals Pty Ltd earned residual income of $70 000 during the year. The net profit was $250 000 during the
year and the required return was 15 per cent. What was the invested capital?
A. $1 200 000
B. $1 500 000
C. $1 400 000
D. $1 300 000
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and disadvantages of using RI to
evaluate performance
12.
A. 0.07
B. 0.67
C. 0.53
D. 0.05
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.02 Describe some advantages and limitations of ROI as a measure of performance of investment centres
14. The advantage of residual income as a measure of investment centre performance is:
A. it can be used to compare investment centres of different sizes.
B. it focuses on long-term performance.
C. it includes the organisation's minimum required rate of return.
D. it can be used to compare investment centres of different sizes AND it includes the organisation's minimum required
rate of return.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and disadvantages of using RI to
evaluate performance
15. Which of the following gives a more accurate calculation of return on investment and residual income?
A. Total capital invested
B. Total assets
C. Average invested capital
D. Average cost of capital
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.05 Recognise the reasons for the various definitions of profit and invested capital that can be used in the calculation of return on
investment and residual income
16. Net book value produces a misleading increase in return on investment because:
A. investment centres with old assets will show a higher return on investment than centres with new assets.
B. investment centres with old assets will show a lower return on investment than investment centres with new assets.
C. investment centres with old assets will show an equal return on investment centres with new assets.
D. book value reflects changing market values.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 13.05 Recognise the reasons for the various definitions of profit and invested capital that can be used in the calculation of return on
investment and residual income
17. One of the advantages of using net book value to measure invested capital is that:
A. it maintains consistency with the balance sheet prepared for external reporting purposes.
B. it allows comparison of return on investment with different companies.
C. the return on investment will increase steadily over time.
D. it maintains consistency with the balance sheet prepared for external reporting purposes AND it allows comparison of
return on investment with different companies.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.05 Recognise the reasons for the various definitions of profit and invested capital that can be used in the calculation of return on
investment and residual income
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
19.
A. Tying rewards to a profit-based measure can provide an incentive for managers to manipulate accounting results.
B. Pay systems can be used at all levels of the organisation.
C. Pay systems focus on long-term results.
D.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.11 Identify the different forms of performance-related pay systems used in organisations
20. Which of the following is an example of an intrinsic reward?
A. Cash bonus
B. Personal satisfaction
C. Larger office
D. Certificate of merit
AACSB: Reflective
Difficulty: Medium
Learning Objective: 13.09 Recognise the difference between intrinsic and extrinsic sources of motivation
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.11 Identify the different forms of performance-related pay systems used in organisations
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
24. Which of the following is the correct mathematical expression for return on investment?
A. Sales margin capital turnover
B. Sales margin – capital turnover
C. Sales margin capital turnover
D. Capital turnover sales margin
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
25. White Hills Ltd reported a return on investment of 12 per cent, a capital turnover of 5 and income of $180 000. What
was the company's invested capital?
A. $300 000
B. $900 000
C. $1 500 000
D. $7 500 000
AACSB: Analytical
Difficulty: Medium
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
26. The northern division of Aussie Estates has reported a profit of $4 million. Divisional invested capital is $2.5 million
and the imputed interest rate is 12 per cent. What is the residual income?
A. $180 000
B. $1.78 million
C. $2.15 million
D. $3 700 000
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and disadvantages of using RI to
evaluate performance
27. The Extan division of World Corporation reported a residual income of $200 000. The division had $8 million of
invested capital and a profit of $1 million. What is the imputed interest rate?
A. 7.5%
B. 10.0%
C. 12.5%
D. 20%
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and disadvantages of using RI to
evaluate performance
28. Speedy Ltd has an imputed interest rate of 12 per cent. Division Z of Speedy Ltd has invested capital of $800 000 and
a return on investment of 15 per cent. What is the residual income?
A. ($24 000)
B. $24 000
C. $96 000
D. None of the given answers
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and disadvantages of using RI to
evaluate performance
29. Return on investment may be improved by increasing:
A. cost of goods sold and expenses.
B. sales margin and cost of capital.
C. sales revenue and cost of capital.
D. capital turnover or sales margin.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
30. All the following actions will increase return on investment except:
A. an increase in sales revenues.
B. a decrease in operating expenses.
C. a decrease in the company's invested capital.
D. a decrease in the number of units sold.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
31. Given that return on investment measures performance over time, the invested capital would most appropriately be
calculated by using:
A. beginning of year assets.
B. average assets.
C. total assets.
D. current assets.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.05 Recognise the reasons for the various definitions of profit and invested capital that can be used in the calculation of return on
investment and residual income
32. Which of the following measures of performance is based, in part, on weighted average cost of capital?
A. Return on investment
B. Capital turnover
C. Return on sales
D. Economic value added
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.07 Evaluate and calculate economic value added (EVA®) and shareholder value added (SVA) as measures of investment centre
performance
33. Tentafield Ltd has an after tax operating income of $2.6 million, assets totalling $8 million and current liabilities totalling
$400 000. The weighted average cost of capital is 10 per cent. What is the economic value added?
A. $1 400 000
B. $1 800 000
C. $1 840 000
D. None of the given answers
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.07 Evaluate and calculate economic value added (EVA®) and shareholder value added (SVA) as measures of investment centre
performance
34.
A. $120 000
B. $180 000
C. $240 000
D. $292 000
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.07 Evaluate and calculate economic value added (EVA®) and shareholder value added (SVA) as measures of investment centre
performance
35. Which of the following are value drivers (i.e. create value for the business)?
i. Growth
ii. Sustainability
iii. Spread
iv. Cost of capital
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. All of the given answers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.06 Explain how shareholder value can be measured and used to manage performance
36. Which of the following strategies may increase economic value added?
A. Increase profit as a percentage of capital employed.
B. Borrow additional funds and invest in assets that earn more than the weighted average cost of capital.
C. Sell off assets that earn more than the weighted average cost of capital.
D.
Increase profit as a percentage of capital employed AND borrow additional funds and invest in assets that earn more than the weighted
average cost of capital.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.07 Evaluate and calculate economic value added (EVA®) and shareholder value added (SVA) as measures of investment centre
performance
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.07 Evaluate and calculate economic value added (EVA®) and shareholder value added (SVA) as measures of investment centre
performance
AACSB: Analytic
Difficulty: Easy
Learning Objective: 13.10 Describe the differences between Herzberg's two-factor theory and the expectancy theory of motivation
AACSB: Analytic
Difficulty: Easy
Learning Objective: 13.10 Describe the differences between Herzberg's two-factor theory and the expectancy theory of motivation
40. Which of the following is/are an extrinsic reward?
A. Share options
B. Job satisfaction
C. Promotion
D. Share options AND promotion
AACSB: Analytic
Difficulty: Easy
Learning Objective: 13.09 Recognise the difference between intrinsic and extrinsic sources of motivation
AACSB: Analytic
Difficulty: Easy
Learning Objective: 13.09 Recognise the difference between intrinsic and extrinsic sources of motivation
42. Which of the following statements is/are correct when describing expectancy theory?
i. The preference that an employee has for a particular reward is called valence.
ii. Expectancy is the likelihood of achieving the performance necessary to earn the reward.
iii. An individual's perception that the effort put into a task will lead to a specific reward outcome is fundamental to
expectancy theory.
A. i and ii
B. ii and iii
C. i and iii
D. All of the given answers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.09 Recognise the difference between intrinsic and extrinsic sources of motivation
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.11 Identify the different forms of performance-related pay systems used in organisations
44. Individual reward schemes have which of the following advantages?
i. They relate to individual effort.
ii. They reward only good performers.
iii. They discourage dysfunctional competition between individuals.
A. i and ii
B. i and iii
C. ii and iii
D. None of the given answers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.11 Identify the different forms of performance-related pay systems used in organisations
45. For which of the following reasons are group pay systems often preferred to individual schemes?
i. They encourage teamwork.
ii. They reduce dysfunctional competition between employees.
iii. They promote equity between employees.
A. i and ii
B. ii and iii
C. i and iii
D. All of the given answers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.11 Identify the different forms of performance-related pay systems used in organisations
46. Which of the following may be implemented as targets for a group or company-wide performance reward scheme?
i. Employee absenteeism
ii. Lost-time accidents
iii. Customer satisfaction
A. i and ii
B. ii and iii
C. i and iii
D. All of the given answers
AACSB: Analytic
Difficulty: Easy
Learning Objective: 13.11 Identify the different forms of performance-related pay systems used in organisations
47. Sunrise Dairies has a return on investment of 15 per cent. A Sunrise division, which currently has a return on
investment of 13 per cent and $750 000 of residual income, is contemplating a large investment that will (1) reduce
divisional return on investment and (2) produce residual income of $120 000. If Sunrise strives for goal congruence, the
investment:
A. should not be approved because it reduces divisional return on investment.
B. should not be approved because the division's return on investment is less than the corporate return on investment
before the investment is considered.
C. should be approved because it produces $120 000 residual income for the division.
D. should be approved because, after acquisition, the division's return on investment and residual income are both
positive numbers.
AACSB: Analytic
Difficulty: Easy
Learning Objective: 13.03 Explain how the negative behavioural incentives associated with using return on investment to evaluate performance can be
minimised
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and disadvantages of using RI to
evaluate performance
48. The Fitzroy division of Brisbane Enterprises has negative residual income of $540 000. Fitzroy's management is
considering an investment opportunity that will reduce this negative amount to $400 000. The investment:
A. should be pursued because it is attractive from divisional and corporate perspectives.
B. should be pursued because it is attractive from a divisional perspective although not from a corporate perspective.
C. should be pursued because it is attractive from a corporate perspective, although not from a divisional perspective.
D. should not be pursued because it is unattractive from a divisional perspective although it is attractive from a corporate
perspective.
AACSB: Analytic
Difficulty: Easy
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and disadvantages of using RI to
evaluate performance
49. (p. 611)
Carlton division has been stagnant for the past ive years, neither growing nor contracing in size and proitability.
Investment in new property, plant and equipment has been minimal. Would the division's use of total assets (valued at
net book value) when measuring return on investment result in (1) using numbers that are consistent with those in the
balance sheet and (2) a rising return on investment over ime?
Consistent with numbers on the balance sheet Produce a rising return on investment over time
A.
Yes Yes
B.
No Yes
C.
No No
D.
Yes Need more information to judge
Difficulty: Medium
Learning Objective: 13.05 Recognise the reasons for the various definitions of profit and invested capital that can be used in the calculation of return on
investment and residual income
50. The income calculation for a divisional manager's return on investment should be based on:
A. divisional contribution margin.
B. profit margin controllable by the divisional manager.
C. profit margin traceable to the division.
D. division income before interest and income tax.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
51. Which of the following is used in the calculation of both return on investment and residual income?
A. Total shareholders' equity
B. Retained earnings
C. Invested capital
D. Cost of capital
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and disadvantages of using RI to
evaluate performance
Learning Objective: 13.07 Evaluate and calculate economic value added (EVA®) and shareholder value added (SVA) as measures of investment centre
performance
52. Which of the following statements is/are false?
i. Return on investment encourages managers to take a long-term view of corporate performance.
ii. Return on investment may encourage managers to defer the replacement of worn assets.
iii. Return on investment may encourage managers to increase expenditure on research and development.
A. i and ii
B. ii and iii
C. i and iii
D. All of the given answers
AACSB: Reflective
Difficulty: Medium
Learning Objective: 13.02 Describe some advantages and limitations of ROI as a measure of performance of investment centres
53. A division of a firm has a net profit of $640 000 before imputed interest and a residual income of $240 000. If a rate of
10 per cent is used to compute imputed interest, calculate the division's return on investment (rounded to a whole
number).
A. 4%
B. 10%
C. 16%
D. 35%
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and disadvantages of using RI to
evaluate performance
54. Which of the following items do not form part of the economic value added calculation?
A. Weighted average cost of capital
B.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.07 Evaluate and calculate economic value added (EVA®) and shareholder value added (SVA) as measures of investment centre
performance
55.
Richard's Division of Richard and Sons has the following data related to a particular period:
A. $70 000
B. $7000
C. $77 000
D. $680 000
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.07 Evaluate and calculate economic value added (EVA®) and shareholder value added (SVA) as measures of investment centre
performance
56.
Richard's Division of Richard and Sons has the following data related to a particular period:
A. 11%
B. 10%
C. 4%
D. Always the same as the imputed interest rate
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
57.
Richard's Division of Richard and Sons has the following data related to a particular period:
A. 4%
B. 11%
C. 40%
D. 0.4%
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
58.
Richard's Division of Richard and Sons has the following data related to a particular period:
A. 0.37 times
B. 11 times
C. 0.11 times
D. 2.7 times
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
59. Which of the following items will be most relevant in determining the imputed interest rate for the purposes of
calculating residual income?
A. Final net profit
B. Return on investment
C. Investment turnover
D. Riskiness of investments undertaken
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and disadvantages of using RI to
evaluate performance
60. The return on investment of a division will increase if the division is able to:
A. increase return on sales and increase investment turnover.
B. increase return on sales or increase investment turnover.
C. increase sales revenue and decrease asset turnover.
D. increase return on sales and/or increase investment turnover.
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
61. Jasmine Dimm is a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre
are responsible for answering calls from Tostra customers. Some calls are very short, relating to simple enquiries.
However, a majority of calls tend to be longer, coming from irate customers complaining about Tostra's services. In these
calls, customers are often very emotional and sometimes even abusive. Call operators have no control over what types of
calls they get.
Jasmine has developed a new incentive system for her call centre staff. Under the new system, call centre operators are
rewarded if they achieve two performance targets: (1) the duration of 90 per cent of the calls is less than 4 minutes and
(2) 80 per cent of customers rate Tostra's 'customer service quality' as 'excellent'. Achieving these two monthly
performance targets will result in a bonus worth 20 per cent of the call operator's monthly salary.
Based on expectancy theory, the major limitation(s) of Jasmine's reward system is:
A. the incentive system lacks valence and instrumentality.
B. the incentive system lacks expectancy.
C. the incentive system lacks instrumentality.
D. the incentive system lacks expectancy and instrumentality.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 13.10 Describe the differences between Herzberg's two-factor theory and the expectancy theory of motivation
62. Jasmine Dimm is a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre
are responsible for making sales calls to customers to promote Tostra's new products. Jasmine sets two performance
targets for her operators: sales and average call duration. Every 6 months, any call centre operator who can achieve both
targets goes into a random draw with a one-in-ten chance of winning a $50 supermarket giftcard.
All her call centre operators agree that these two targets are clearly specified, objectively measured and achievable with
hard work. However, the call centre operators are still unhappy with the new incentive system. According to the
expectancy theory, this is because:
A. the incentive system lacks valence and instrumentality.
B. the incentive system lacks expectancy.
C. the incentive system lacks expectancy and valence.
D. the incentive system lacks expectancy and instrumentality.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 13.10 Describe the differences between Herzberg's two-factor theory and the expectancy theory of motivation
63.
A. i
B. i and ii
C. i and iii
D. ii and iii
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.12 Outline the advantages and disadvantages associated with group versus individual rewards
64. Which of the following information is required to compute SVA (shareholder value added)?
i. PV of cash flows from operations for a certain time period
ii Residual value of the business
iii EVA (economic value added)
A. i and ii
B. i and iii
C. i, ii and iii
D. i
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.07 Evaluate and calculate economic value added (EVA®) and shareholder value added (SVA) as measures of investment centre
performance
65. Which of the following is a key difference between EVA and residual income?
A. The weighted average cost of capital is used to calculate EVA, but not necessarily for residual income.
B. Net profit is used to calculate residual income but is irrelevant for EVA.
C. EVA has a long term focus, but residual income has a short term focus.
D. There is no difference between EVA and residual income.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.07 Evaluate and calculate economic value added (EVA®) and shareholder value added (SVA) as measures of investment centre
performance
66.
A. 7.6%
B. 9.25%
C. 10.9%
D. 9.5%
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.07 Evaluate and calculate economic value added (EVA®) and shareholder value added (SVA) as measures of investment centre
performance
67.
A. 11.2%
B. 10%
C. 7.8%
D. 9.5%
AACSB: Analytical
Difficulty: Medium
Learning Objective: 13.07 Evaluate and calculate economic value added (EVA®) and shareholder value added (SVA) as measures of investment centre
performance
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.06 Explain how shareholder value can be measured and used to manage performance
69. Which of the following statements about developing reward system is incorrect?
A. The key benefit of a profit sharing plan is to encourage employees to think like owners.
B. The key benefit of gain sharing plan is to introduce equity, ensuring the employees who contribute to the business can
get a share of the gains.
C. The key benefit of an employee share plan is to reduce free-riding problems.
D. The key benefit of an individual-based incentive system is to highlight improved expectancy and instrumentality.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 13.11 Identify the different forms of performance-related pay systems used in organisations
70. Braham Farms has a return on investment of 15 per cent. A Braham division, which currently has a return on
investment of 13 per cent and $375 000 of residual income, is contemplating a large investment that will (1) reduce
divisional return on investment and (2) produce residual income of $60 000. If Braham strives for goal congruence, the
investment:
A. should not be approved because it reduces divisional return on investment.
B. should not be approved because the division's return on investment is less than the corporate return on investment
before the investment is considered.
C. should be approved because it produces $60 000 residual income for the division.
D. should be approved because, after acquisition, the division's return on investment and residual income are both
positive numbers.
AACSB: Analytic
Difficulty: Easy
Learning Objective: 13.03 Explain how the negative behavioural incentives associated with using return on investment to evaluate performance can be
minimised
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and disadvantages of using RI to
evaluate performance
71. When employees feel that they have made a significant achievement in reaching the purpose of the task they are
working on, this has been identified (Robbins et al., 2004; Thomas, 2000) as:
A. competence.
B. progress.
C. meaningfulness.
D. choice.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 13.08 Explain how reward systems can be designed and used to enhance goal congruence
72. When employees have the opportunity in the larger scheme of things, to pursue a task that they consider worthy, this
has been identified (Robbins et al., 2004; Thomas, 2000) as:
A. competence.
B. progress.
C. meaningfulness.
D. choice.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 13.08 Explain how reward systems can be designed and used to enhance goal congruence
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.12 Outline the advantages and disadvantages associated with group versus individual rewards
74. Under a deferred payment incentive schemes managers are likely to:
A. maximise short-term profit.
B. focus on short-term plans.
C. maximise medium and long-term profits.
D. strive for short-term performance.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.13 Recognise the importance of the frequency and timing of the payment of incentive payments to enhance motivation and
performance
75. Providing an employee incentive scheme that offers more frequent and timely incentives will:
A. discourage employees from making performance targets.
B. continually motivate employees.
C. not impact on an employee's performance.
D. provide no indication of an employee's target achievements.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 13.13 Recognise the importance of the frequency and timing of the payment of incentive payments to enhance motivation and
performance
76. Jasmine Dimm is a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre
are responsible for answering calls from Tostra customers. Some calls are very short, relating to simple enquiries.
However, a majority of calls tend to be longer, coming from irate customers complaining about Tostra's services. For these
calls, customers are often very emotional and sometimes even abusive. The call centre operators are only responsible for
documenting the complaints and are generally unable to solve the problems for the customers.
Jasmine has developed a new reward system for her call centre staff. Under the new system, call centre operators are
rewarded with a substantial bonus (20 per cent of annual salary) if they achieve two performance targets: (1) a target set
on average call duration; and (2) a target based on 'customer service quality'. While the call centre operators working for
Jasmine all agree that these performance targets are reasonable, they are unhappy with Jasmine's overbearing
personality. Many operators are also experiencing a lot of stress when dealing with rude customers.
Discuss the limitations of Jasmine's new reward system, using the concept of intrinsic motivation and extrinsic motivation.
Extrinsic motivations are derived from outside of the individual. Intrinsic motivations are derived from the interests and
enjoyment at work. Jasmine's reward system focuses only on extrinsic rewards, namely the substantial financial bonuses.
However, because of Jasmine's overbearing personality, it is likely employees do not feel happy or satisfied working under
her. Answering calls from complaining customers are not likely to result in job satisfaction, especially if there is nothing the
operator can do to solve customers' problems. Thus, the work is unlikely to be meaningful and intrinsic motivation will be
low.
AACSB: Communication
Difficulty: Hard
Learning Objective: 13.09 Recognise the difference between intrinsic and extrinsic sources of motivation
77. Identify and describe two advantages and two limitations of using return on investment (ROI) to evaluate the
performance of investment centres.
AACSB: Communication
AACSB: Reflective
Difficulty: Medium
Learning Objective: 13.02 Describe some advantages and limitations of ROI as a measure of performance of investment centres
78. Discuss three ways that the problems associated with using Return on Investment (ROI) can be minimised.
The problems associated with ROI can be minimised in the following ways.
1. Using ROI as only one of a series of performance measures that focus on both short-term and long-term performance.
This approach is taken by many companies. A more balanced set of measures (both financial and non-financial) can
counter the dysfunctional incentives associated with ROI.
2. Considering alternative ways of measuring invested capital, so that the replacement of an asset is less likely to result in
a reduction of ROI. Many businesses measure invested capital at its carrying amount, which is often low at the time of
asset replacement. If alternative measures of invested capital, such as market value or replacement cost, are used, the
replacement decision will not cause a major change in the investment base.
3. Using alternative financial measures, such as residual income or economic value added.
AACSB: Communication
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.03 Explain how the negative behavioural incentives associated with using return on investment to evaluate performance can be
minimised
79. When measuring profit and invested capital, managers have to decide how they will define what will be included in
invested capital, then apply that definition consistently throughout the one organisation. Identify and explain with an
example, the three definitions of invested capital that can be applied.
Exhibit 13.1 shows that the Smelting business had balances at the end of the financial year of $185 million in current assets; $700
million in non-current assets such as plant and equipment; and $15 million tied up in a plant under construction. In addition, the balance
of current liabilities was $110 million.
There are several ways of defining 'invested capital':
Total assets. This measure of invested capital is appropriate if the investment centre manager is responsible for decisions about all of
the assets of the investment centre, including non-productive assets.
Total productive assets. In some companies, investment centre managers may be directed by corporate management to retain non-
productive assets such as vacant land or construction in progress. In such cases it is appropriate to exclude these non-productive
assets from the measure of invested capital. Under this alternative, $885 million would have been used in the ROI and residual income
calculations (total assets of $900 million less $15 million for the plant under construction).
Total assets less current liabilities. In some companies, managers in investment centres manage certain short-term liabilities, including
short-term bank loans and employee entitlements such as the provision for long-service leave. In these cases, invested capital can be
measured as total assets less current liabilities. This approach encourages the managers to minimise resources tied up in assets and to
manage the use of short-term credit to finance operations. If this approach had been used by the Smelting business, the invested
capital would have been $790 million (total assets of $900 million less current liabilities of $110 million).
AACSB: Analytical
AACSB: Communication
AACSB: Reflective
Difficulty: Medium
Learning Objective: 13.05 Recognise the reasons for the various definitions of profit and invested capital that can be used in the calculation of return on
investment and residual income
80. Value-based management (VBM) is a framework for making key decisions that add economic value to the business.
Morin & Jarrell (2001) identified four aspects of VBM. Identify these four aspects and in your own words outline how these
aspects assist managers in their decision making.
When organisations use shareholder value analysis to manage their business, they are said to be practising value-based management
(VBM), which is a framework for making key business decisions that add economic value to the business. A particular strategy or
decision creates shareholder value, where the return on capital is greater than the cost of capital. Thus, managers need to understand
how to generate, evaluate and select business strategies, or undertake activities that will increase the value of the firm. This involves
being able to measure the value created from decisions, such as whether to acquire a new business or move into new markets. Product
lines or business units that are not providing sufficient value may be deleted, and the outcomes of a proposed project or asset
acquisition can be analysed in terms of value creation.
There are four aspects of VBM: valuation, strategy, finance and corporate governance (Morin & Jarrell, 2001).
Valuation
Value can be measured in several ways. Discounted cash flow (DCF) models are commonly used to measure value. The use of DCF
to measure shareholder value makes sense, as investors and the capital markets often value a business based on the discounted
future cash flows of the business. In some cases, however, it is difficult to measure such cash flows, so surrogates may be used. For
example, the market capitalisation of the company—that is, the market price per share multiplied by the number of shares on issue—
may be used.
To increase the value of a firm, managers need to understand the drivers of value. Value drivers are the activities or actions that create
value for a business. These drivers include:
spread, which is the degree to which a firm can earn a return that is greater than its cost of capital;
growth in funds available to invest in value-creation activities;
sustainability of those funds over many years; and
cost of capital.
The first three drivers increase cash flow, which interacts with the cost of capital to increase shareholder value.
Strategy, finance and corporate governance
The other three aspects of VBM are strategy, finance and corporate governance. Strategic decisions have a substantial and continuing
impact on the value of a business. Valuation techniques can assist managers to compare the value created by alternative differentiation
or cost strategies. Financial policies, such as the adoption of particular financial and capital structures that reduce the cost of capital,
will also influence value creation.
Corporate governance involves selecting and implementing systems that contribute to value creation. Performance measures can be
developed to measure the value-creating performance of business units and managers. Managerial reward systems can be designed to
link managers' compensation to their performance in creating value, as well as to guide managers' value creation activities.
AACSB: Communication
AACSB: Reflective
Difficulty: Hard
Learning Objective: 13.06 Explain how shareholder value can be measured and used to manage performance
81. Motivation of staff is a key factor in a company achieving their goals and ensuring goal congruence.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.09 Recognise the difference between intrinsic and extrinsic sources of motivation
82. Invested capital can be defined as net assets, total assets, productive assets or working capital.
FALSE
AACSB: Reflective
Difficulty: Medium
Learning Objective: 13.05 Recognise the reasons for the various definitions of profit and invested capital that can be used in the calculation of return on
investment and residual income
83. When using residual income, some companies prefer to use the weighted average cost of capital as a basis for
determining the imputed interest charge.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and disadvantages of using RI to
evaluate performance
84. Companies using value-based management operate within a framework of making key decisions that add economic
value to the business.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.07 Evaluate and calculate economic value added (EVA®) and shareholder value added (SVA) as measures of investment centre
performance
85. The formula for economic value added and the residual income are interchangeable.
FALSE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.07 Evaluate and calculate economic value added (EVA®) and shareholder value added (SVA) as measures of investment centre
performance
86. Gainsharing is one system companies can use to distribute cash bonuses to employees when the performance of
their segment outperforms the set target.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.11 Identify the different forms of performance-related pay systems used in organisations
87. One of the main advantages of return on investment is that it can be used with some responsibility centres to evaluate
performance.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.02 Describe some advantages and limitations of ROI as a measure of performance of investment centres
88. Expectancy theory relates employee motivation to valence, expectancy and instrumentality.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.09 Recognise the difference between intrinsic and extrinsic sources of motivation
89. Designing incentive schemes systems is an easy process and is a definite way of ensuring goal congruence.
FALSE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.08 Explain how reward systems can be designed and used to enhance goal congruence
90. Return on equity and investment turnover are the components of the expanded return on investment [ROI] formula
that enables management to identify ways of improving the ROI.
FALSE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
91. The imputed interest rate is the firm's required rate of return.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and disadvantages of using RI to
evaluate performance
92. Value drivers are the activities or actions that decrease value for a business.
FALSE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.06 Explain how shareholder value can be measured and used to manage performance
93. According to Herzberg's two-factor theory, the degree to which the outcome satisfies the individual's goals, and the
attractiveness of the reward for the individual is known as valence.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.10 Describe the differences between Herzberg's two-factor theory and the expectancy theory of motivation
Chapter 13 Testbank Summary
Category # of Que
stions
AACSB: Analytic 8
AACSB: Analytical 26
AACSB: Communication 5
AACSB: Reflective 58
Difficulty: Easy 74
Difficulty: Hard 2
Difficulty: Medium 17
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI) 22
Learning Objective: 13.02 Describe some advantages and limitations of ROI as a measure of performance of investment 4
centres
Learning Objective: 13.03 Explain how the negative behavioural incentives associated with using return on investment to 3
evaluate performance can be minimised
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and d 16
isadvantages of using RI to evaluate performance
Learning Objective: 13.05 Recognise the reasons for the various definitions of profit and invested capital that can be use 7
d in the calculation of return on investment and residual income
Learning Objective: 13.06 Explain how shareholder value can be measured and used to manage performance 4
Learning Objective: 13.07 Evaluate and calculate economic value added (EVA®) and shareholder value added (SVA) as 14
measures of investment centre performance
Learning Objective: 13.08 Explain how reward systems can be designed and used to enhance goal congruence 3
Learning Objective: 13.09 Recognise the difference between intrinsic and extrinsic sources of motivation 7
Learning Objective: 13.10 Describe the differences between Herzberg's two-factor theory and the expectancy theory of 5
motivation
Learning Objective: 13.11 Identify the different forms of performance-related pay systems used in organisations 8
Learning Objective: 13.12 Outline the advantages and disadvantages associated with group versus individual rewards 2
Learning Objective: 13.13 Recognise the importance of the frequency and timing of the payment of incentive payments t 2
o enhance motivation and performance
Chapter 14 Testbank
Student: ___________________________________________________________________________
1. Which of the following are likely to cause some non-financial measures to be unable to be translated into financial
outcomes?
i. Reduced machine breakdowns
ii. Increased spending on new technology
iii. Improved on-time deliveries
iv. Reduced marketing effort
A. i and ii
B. i and iii
C. i and iv
D. ii and iv
2. A visual representation that assists managers to see the linkages between the balanced scorecard and the
organisation's objectives is known as a:
A. linking presentation.
B. visual scorecard.
C. organisational chart.
D. strategy map.
4. Which of the following statements are limitations associated with traditional performance measures?
i. They may encourage short-term financial performance.
ii. They describe results not causes.
iii. They do not emphasise areas that need development for long-term goal achievement.
A. i and ii
B. ii and iii
C. i and iii
D. All of the given answers
5. Which of the following are likely to be the result of concentration on short-term performance measures?
i. Reduced expenditure on product development
ii. Increased spending on new technology
iii. Increased employee training
iv. Reduced marketing effort
A. i and ii
B. i and iii
C. i and iv
D. ii and iv
6. All the following are methods of comparison used in performance measurement. Which are inadequate as modern
measures?
i. Standard costs
ii. Past periods
iii. Budget targets
iv. Benchmarks
A. i, ii and iv
B. ii, iii and iv
C. i, iii and iv
D. i, ii and iii
Non-financial measures may reflect drivers of future financial performance AND non-financial measures are more difficult to
understand.
9. Which of the following are performance measures of delivery at the shop floor level?
i. Standard cost variances
ii. Accident reports
iii. Schedule adherence
iv. Number of units completed
A. iii and iv
B. ii and iii
C. i and iii
D. ii and iv
10. On which of the following is the Kaplan and Norton framework for developing a balanced scorecard is based?
i. Financial perspective
ii. Customer perspective
iii. Learning and growth
iv. Internal processes
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. All of the given answers
11. The number of products returned by customers, the number of product defects and on-time delivery are measures
related to:
A. financial perspective.
B. customer perspective.
C. internal business processes.
D. learning and growth.
12. Employee satisfaction, absenteeism and employee suggestions implemented are measures related to:
A. financial perspective.
B. customer perspective.
C. internal business processes.
D. learning and growth.
13. Performance measures, which include cost, product quality and manufacture cycle time, are related to:
A. financial perspective.
B. customer perspective.
C. internal business processes.
D.
14. Performance measures, including shareholder value, residual value and cash flow are related to:
A. financial perspective.
B. customer perspective.
C. internal business processes.
D. learning and growth.
15. Which of the following are used by most successful organisations when evaluating performance?
A.
No Yes
B.
Yes No
C.
Yes Yes
D.
To a limited degree only Yes
16. An increasingly popular approach that integrates financial and customer performance measures with measures in the
areas of internal operations and innovation is known as:
A. the integrated performance measurement tool.
B. the balanced scorecard.
C. integrated efficiency.
D. benchmarking.
17. Southern Cruises Ltd, which operates in a very competitive marketplace, is considering four categories of
performance measures: (i) profitability (ii) customer satisfaction (iii) efficiency and quality and (iv) innovation. The
company assigns one manager to each ship in its fleet to oversee the ship's general operations. If Southern Cruises Ltd
desired to adopt a balanced scorecard approach, which measures should it use in the evaluation of managers?
A. i and ii
B. ii and iii
C. i, ii and iv
D. All of the given answers
18. Measures that monitor the progress towards the organisation's goals are called:
A. lead indicators.
B. lag indicators.
C. benchmark indicators.
D. progress indicators.
19. Measures that monitor the factors that drive outcomes are called:
A. lead indicators.
B. lag indicators.
C. benchmark indicators.
D. cause and effect indicators.
20. Market share may be a lead indicator from:
A. a financial perspective.
B. a customer perspective.
C. internal business processes.
D. learning and growth.
22. Elements that derive from the competitive strategy and are essential to the success of the organisation are called:
A. key performance indicators.
B. critical success factors.
C. key performance factors.
D. critical success drivers.
23. On which of the following does a balanced scorecard approach focus on?
A. Strategic objectives
B. Critical success factors
C. Performance measures at all levels of the business
D. All of the given answers
24. The ultimate performance measure is expressed in financial terms; however, it is often difficult to relate non-financial
measures to financial outcomes. Which of the following may be reasons for apparent success in improving non-financial
measures not translating into financial improvement?
A. Failure to utilise freed-up resources
B. Identifying incorrect critical success factors
C. Incorrect design of performance measures
D. All of the given answers
25. Which of the following may result in failure to utilise the freed up resources flowing from improved performance?
A. Difficulty in disposing of excess equipment
B. Inability to increase sales to take up the idle capacity
C. Imbalance between resources made idle and those required for increasing activity levels
D. All of the given answers
29. The extent to which a business needs to improve to reach best practice is termed:
A. performance target.
B. performance goal.
C. performance gap.
D. performance driver.
30. Benchmarking that involves comparison with firms with similar interests and technologies is termed:
A. competitive benchmarking.
B. industry benchmarking.
C. process benchmarking.
D. external benchmarking.
31. Benchmarking that involves comparison with best practices that occur in any industry is termed:
A. internal benchmarking.
B. industry benchmarking.
C. process benchmarking.
D. external benchmarking.
32. Normalisation is used to remove the effects of factors outside the control of the organisation in:
A. competitive benchmarking.
B. industry benchmarking.
C. process benchmarking.
D. external benchmarking.
33. Which is the easiest form of benchmarking to establish?
A. Competitive benchmarking
B. Internal benchmarking
C. Industry benchmarking
D. Process benchmarking
34. An important concern for all companies in competitive markets is to access competitors' costs. It is clear that
competitors will not willingly supply cost data and thus other sources need to be explored. Which of the following may be
used to identify competitors' costs?
A. Publicly available data such as sales volume, market share and product mix
B. Industry databases
C. Company reports and analyses from stockbrokers
D. All of the given answers
35.
Which of the following performance measures would be classified as a lag indicator for a coachline company whose objective was to
improve profitability?
36. One of the signs that a firm's performance measurement system is inadequate is when performance measures show
improvement but this is not translated into profit. In which of the following circumstances may this occur?
i. Resources freed up through improvements may not have been utilised to improve profitability.
ii. Factors being measured are not critical success factors.
iii. Too many similar measures are used.
iv. There is a time lag between improved performance and improved profitability.
A. i, ii and iii
B. ii, iii and iv
C. i, ii and iv
D. i, iii and iv
37. Which of the following would be classified as a lead indicator for a bus company where customer satisfaction was their
objective?
A. Customer satisfaction measure
B. Number of new passengers per month
C. Number of bus accidents
D. Number of regular customers retained
38. In which of the following sectors has the balanced scorecard been widely used?
A. Not-for-profit
B. All of the sectors use balanced scorecards
C. Government
D. Business
39. According to the Du Pont chart, Return on Investment (ROI) links directly to:
A. Profit and revenues.
B. Revenues and costs.
C. Invested capital and revenues.
D. Profit and invested capital.
40. Organisations that aim to become and remain world-class will strive for:
A. continuous improvement.
B. greater profitability.
C. increased investment.
D. market leadership.
41. Which of the following statements most correctly completes the following sentence that identifies some of the
limitations of traditional management accounting? 'Traditional management accounting focuses on '
A. financial performance measures, labour-related activity measures and cost elimination.
B. financial performance measures, volume-related activity measures and cost control.
C. non-financial performance measures, labour-related activity measures and cost elimination.
D. financial performance measures, labour-related activity measures, cost elimination, volume-related activity measures
and cost control.
42. Which of the following statements is most correct about the selection of performance measures?
A. The key stakeholders are the owners of the firm and therefore financial performance measures will always be the most
crucial.
B. In today's environment, firms are likely to have an appropriate mix of both financial and non-financial performance
measures.
C. In the modern manufacturing environment, it is likely that non-financial performance measures will replace financial
performance measures.
D. Because of the focus on critical success factors, it is likely that non-financial performance measures will replace
financial performance measures.
43. Assuming you must choose one measure only, which of the following non-financial performance indicators would most
likely be chosen to measure employee satisfaction?
A. Number of repeat orders
B. Percentage of absenteeism
C. Number of complaints about service
D. Percentage of idle time
44. Assuming you must choose one measure only, which of the following non-financial performance indicators would most
likely be chosen to measure quality?
A. Number of repeat orders
B. Percentage of absenteeism
C. Machine downtime
D. Percentage of idle time
45. Assuming you must choose one measure only, which of the following non-financial performance indicators would most
likely be chosen to measure satisfaction with delivery?
A. Number of repeat orders
B. Percentage of absenteeism
C. Number of complaints about service
D. Units produced
46. Assuming you must choose one measure only, which of the following non-financial performance indicators would most
likely be chosen to measure productivity?
A. Units produced per month
B. Number of repeat orders
C. Percentage of absenteeism
D. Percentage of idle time
47. Assuming you must choose one measure only, which of the following non-financial performance indicators would most
likely be chosen as a measure of the production process?
A. Number of repeat orders
B. Percentage of idle time
C. Percentage of absenteeism
D. Number of complaints about service
49. Which of the following statements about performance measures is most correct and complete?
A. Most financial performance measures are lead indicators.
B. Most financial performance measures are lag indicators.
C. All non-financial performance measures are lead indicators.
D. All non-financial performance measures are lag indicators.
50. From the following statements about benchmarking, select the incorrect statement.
A. Benchmarking involves working towards best practice.
B. Benchmarking requires selection of a benchmarking partner.
C. Benchmarking requires measuring against another firm in exactly the same type of business.
D. Benchmarking involves continuous improvement.
54. Which of the following comments best describes the appropriate application of benchmarking to a medium-sized
Australian company with a range of products and services specifically designed for local conditions and demands?
A. In the absence of a valid basis for comparison, benchmarking is unlikely to be informative in this case.
B. Benchmarking should be based on world best practice for the nearest equivalent organisation.
C. Efforts should be made to compare particular activities and processes with similar processes elsewhere, allowing for
differences in the business environment.
D. The use of benchmarking may inhibit originality in meeting the special features and unique needs of the firm's market.
55. The management accountant at Kaster Furniture Makers decides to include the following measures on their balanced
scorecard (BSC): customer satisfaction, rework costs, on-time delivery, average shopfloor personnel qualification and
sales growth in local markets. These measures belong to which BSC perspectives?
A.
B.
Financial perspective Internal business process perspective
Sales growth in the local markets Rework costs
Customer perspective Learning and growth perspective
On-time delivery, customer satisfaction Average shopfloor personnel qualification
C.
Financial perspective Internal business process perspective
Rework costs On-time delivery
Customer perspective Learning and growth perspective
Sales growth in the local markets, customer satisfaction Average shopfloor personnel qualification
D.
Financial perspective Internal business process perspective
Sales growth in the local markets; Rework costs On time delivery; Average shopfloor personnel qualification
Customer perspective Learning and growth perspective
Customer satisfaction
56. The internal business process perspective of a balanced scorecard may contain which of the following set of
performance measures?
A. Sales force efficiency, percentage of warranty claims, number of employees completed internal training
B. Defect costs, employee satisfaction rating, number of customer complaints
C. Sales force efficiency, scrap costs, percentage of machine downtime
D. Number of incorrect deliveries to customers, production cycle time, profit margin
57. Which of the following is the most appropriate lead indicator in relation to 'customer satisfaction rating'?
A. Market share
B. Number of customer complaints
C. Percentage of on-time delivery
D. Sales growth
58. Which of the following is the most appropriate lag indicator in relation to 'customer satisfaction rating'?
A. Sales growth
B. Number of customer complaints
C. Percentage of employees with tertiary qualifications
D. Percentage of on-time delivery
59. Which of the following is the most appropriate lag indicator in relation to 'percentage of products passed final quality
inspection'?
A. Percentage of machine downtime
B. Number of customer complaints
C. Percentage of on-time delivery
D. Number of employees who completed quality training
60. Which of the following about a strategic performance measurement system (SPMS) is incorrect?
A. It is a system that focuses on translating a strategy into financial and non-financial measures.
B. SPMS requires linking performance measures in cause-and-effect relationships.
C. SPMS always require the development of a strategy map first, followed by a balanced scorecard.
D. SPMS can be used by non-profit organisations.
61. Which of the following statements about the DuPont chart is incorrect?
A. It shows that return on investment can be decomposed into profit and costs.
B. It identifies lead indicators of revenue.
C. It identifies lead indicators of costs.
D. Its underlying assumption is that return on investment is the 'ultimate' goal.
62.
The balanced scorecard requires measures to 'cascade down' an organisation, this means:
A. Managers should start with the lag indicators and work downwards to identify lead indicators.
B. Managers should start with the lead indicators and work downwards to identify lag indicators.
C. Managers should produce reports that are highly aggregated and then allow users to 'drill down' each measure to find
more specific details. This avoids information overload.
D. Managers should ensure that objectives, performance measures and targets of organisational units and individual
managers are reflective of the objectives, performance measures and targets at the higher organisational levels.
63. Echo Beetle is an interior design and renovation management firm. The customer perspective of Echo Beetle's
balanced scorecard contain these two measures: (1) client satisfaction rating and (2) percentage of projects completed
on-time. Which of the following are the most appropriate measures on Echo Beetle's internal business process
perspective?
A. Adherence to project schedule (%), number of projects that passed internal quality inspection
B. Machine down time, productivity
C. Product defects, number of customer complaints
D. Time employees spent on training, cost per project
66.
68. Benchmarking
Explain the different ways in which benchmarking may be achieved and the limitations of each.
69. Identify and discuss the four main reasons why improved non-financial performance at an operational level may not
lead to improved profitability.
70. One of the limitations with the traditional accounting system is that it is common to measure current performance
against the previous year's performance, which is not an indicator that the business's performance is good enough.
True False
71. The perspectives that are generally considered with the balanced scorecard are the same regardless of whether the
business is a profit or not-for-profit concern.
True False
72. In production, the time taken to get materials and machinery ready for a run is termed set-up time.
True False
73. Some of the measures that can be used for measuring competitiveness include market ratios, capital structure and
liquidity.
True False
74. The Du Pont chart identifies linkages between key performance drivers, key performance indicators and financial
performance measures.
True False
75. Strategy maps are useful for explaining the cause-and-effect relationships that link business processes and
resources.
True False
76. As customer expectations increase and stronger competition, organisations have to continually improve their
performance to retain their competitive position.
True False
77. Quality and customer satisfaction are non-financial measures that can be drivers of future financial performance.
True False
78. One way of setting up a system of continuous improvement is to utilise benchmarking for comparing products
functions and activities.
True False
79. One disadvantage of non-financial measures is their inability to drive future financial performance.
True False
80.
A criticism of non- financial measures it that over time a number of non-financial measures are replaced but the previous measure
continues to exist.
True False
Chapter 14 Testbank Key
1. Which of the following are likely to cause some non-financial measures to be unable to be translated into financial
outcomes?
i. Reduced machine breakdowns
ii. Increased spending on new technology
iii. Improved on-time deliveries
iv. Reduced marketing effort
A. i and ii
B. i and iii
C. i and iv
D. ii and iv
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.04 Outline the limitations of relying on non-financial performance measures
2. A visual representation that assists managers to see the linkages between the balanced scorecard and the
organisation's objectives is known as a:
A. linking presentation.
B. visual scorecard.
C. organisational chart.
D. strategy map.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.06 Outline the purpose of a strategy map
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.01 Explain why traditional financial performance measures alone are not sufficient for managing an organisation
4. Which of the following statements are limitations associated with traditional performance measures?
i. They may encourage short-term financial performance.
ii. They describe results not causes.
iii. They do not emphasise areas that need development for long-term goal achievement.
A. i and ii
B. ii and iii
C. i and iii
D. All of the given answers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.01 Explain why traditional financial performance measures alone are not sufficient for managing an organisation
5. Which of the following are likely to be the result of concentration on short-term performance measures?
i. Reduced expenditure on product development
ii. Increased spending on new technology
iii. Increased employee training
iv. Reduced marketing effort
A. i and ii
B. i and iii
C. i and iv
D. ii and iv
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.01 Explain why traditional financial performance measures alone are not sufficient for managing an organisation
6. All the following are methods of comparison used in performance measurement. Which are inadequate as modern
measures?
i. Standard costs
ii. Past periods
iii. Budget targets
iv. Benchmarks
A. i, ii and iv
B. ii, iii and iv
C. i, iii and iv
D. i, ii and iii
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.01 Explain why traditional financial performance measures alone are not sufficient for managing an organisation
7. Which of the following statements is/are true?
A. Non-financial measures may reflect drivers of future financial performance.
B. Non-financial measures are more difficult to understand.
C. Non-financial measures are more difficult to action.
D.
Non-financial measures may reflect drivers of future financial performance AND non-financial measures are more difficult to
understand.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.02 Explain the advantages that non-financial performance measures offer over financial measures
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.02 Explain the advantages that non-financial performance measures offer over financial measures
9. Which of the following are performance measures of delivery at the shop floor level?
i. Standard cost variances
ii. Accident reports
iii. Schedule adherence
iv. Number of units completed
A. iii and iv
B. ii and iii
C. i and iii
D. ii and iv
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.03 Select appropriate forms of operational measures to assess different areas of operational performance
10. On which of the following is the Kaplan and Norton framework for developing a balanced scorecard is based?
i. Financial perspective
ii. Customer perspective
iii. Learning and growth
iv. Internal processes
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. All of the given answers
Difficulty: Easy
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
11. The number of products returned by customers, the number of product defects and on-time delivery are measures
related to:
A. financial perspective.
B. customer perspective.
C. internal business processes.
D. learning and growth.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
12. Employee satisfaction, absenteeism and employee suggestions implemented are measures related to:
A. financial perspective.
B. customer perspective.
C. internal business processes.
D. learning and growth.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
13. Performance measures, which include cost, product quality and manufacture cycle time, are related to:
A. financial perspective.
B. customer perspective.
C. internal business processes.
D.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
14. Performance measures, including shareholder value, residual value and cash flow are related to:
A. financial perspective.
B. customer perspective.
C. internal business processes.
D. learning and growth.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
15. (p. 642) Which of the following are used by most successful organisations when evaluating performance?
A.
No Yes
B.
Yes No
C.
Yes Yes
D.
To a limited degree only Yes
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.01 Explain why traditional financial performance measures alone are not sufficient for managing an organisation
16. An increasingly popular approach that integrates financial and customer performance measures with measures in the
areas of internal operations and innovation is known as:
A. the integrated performance measurement tool.
B. the balanced scorecard.
C. integrated efficiency.
D. benchmarking.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
17. Southern Cruises Ltd, which operates in a very competitive marketplace, is considering four categories of
performance measures: (i) profitability (ii) customer satisfaction (iii) efficiency and quality and (iv) innovation. The
company assigns one manager to each ship in its fleet to oversee the ship's general operations. If Southern Cruises Ltd
desired to adopt a balanced scorecard approach, which measures should it use in the evaluation of managers?
A. i and ii
B. ii and iii
C. i, ii and iv
D. All of the given answers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
18. Measures that monitor the progress towards the organisation's goals are called:
A. lead indicators.
B. lag indicators.
C. benchmark indicators.
D. progress indicators.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.07 Demonstrate the cause-and-effect linkages between measures in a strategic performance measurement system
19. Measures that monitor the factors that drive outcomes are called:
A. lead indicators.
B. lag indicators.
C. benchmark indicators.
D. cause and effect indicators.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.07 Demonstrate the cause-and-effect linkages between measures in a strategic performance measurement system
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.07 Demonstrate the cause-and-effect linkages between measures in a strategic performance measurement system
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.07 Demonstrate the cause-and-effect linkages between measures in a strategic performance measurement system
22. Elements that derive from the competitive strategy and are essential to the success of the organisation are called:
A. key performance indicators.
B. critical success factors.
C. key performance factors.
D. critical success drivers.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
23. On which of the following does a balanced scorecard approach focus on?
A. Strategic objectives
B. Critical success factors
C. Performance measures at all levels of the business
D. All of the given answers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
24. The ultimate performance measure is expressed in financial terms; however, it is often difficult to relate non-financial
measures to financial outcomes. Which of the following may be reasons for apparent success in improving non-financial
measures not translating into financial improvement?
A. Failure to utilise freed-up resources
B. Identifying incorrect critical success factors
C. Incorrect design of performance measures
D. All of the given answers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.10 Explain why improving non-financial performance may not always lead to improved financial performance
25. Which of the following may result in failure to utilise the freed up resources flowing from improved performance?
A. Difficulty in disposing of excess equipment
B. Inability to increase sales to take up the idle capacity
C. Imbalance between resources made idle and those required for increasing activity levels
D. All of the given answers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.10 Explain why improving non-financial performance may not always lead to improved financial performance
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.10 Explain why improving non-financial performance may not always lead to improved financial performance
27. Which of the following statements is/are true?
i. A Du Pont chart includes lag indicators for revenue measures.
ii. A Du Pont chart includes lead indicators for costs.
iii. A Du Pont chart fails to show any relationship between cost and invested capital.
iv. A Du Pont chart clearly shows the relationship between lead indicators and invested capital.
A. i, ii and iii
B. ii, iii and iv
C. i, ii and iv
D. All of the given answers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.10 Explain why improving non-financial performance may not always lead to improved financial performance
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.12 Describe the basic steps of benchmarking and explain how benchmarking can improve competitiveness
29. The extent to which a business needs to improve to reach best practice is termed:
A. performance target.
B. performance goal.
C. performance gap.
D. performance driver.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.12 Describe the basic steps of benchmarking and explain how benchmarking can improve competitiveness
30. Benchmarking that involves comparison with firms with similar interests and technologies is termed:
A. competitive benchmarking.
B. industry benchmarking.
C. process benchmarking.
D. external benchmarking.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.12 Describe the basic steps of benchmarking and explain how benchmarking can improve competitiveness
31. Benchmarking that involves comparison with best practices that occur in any industry is termed:
A. internal benchmarking.
B. industry benchmarking.
C. process benchmarking.
D. external benchmarking.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.12 Describe the basic steps of benchmarking and explain how benchmarking can improve competitiveness
32. Normalisation is used to remove the effects of factors outside the control of the organisation in:
A. competitive benchmarking.
B. industry benchmarking.
C. process benchmarking.
D. external benchmarking.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.12 Describe the basic steps of benchmarking and explain how benchmarking can improve competitiveness
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.12 Describe the basic steps of benchmarking and explain how benchmarking can improve competitiveness
34. An important concern for all companies in competitive markets is to access competitors' costs. It is clear that
competitors will not willingly supply cost data and thus other sources need to be explored. Which of the following may be
used to identify competitors' costs?
A. Publicly available data such as sales volume, market share and product mix
B. Industry databases
C. Company reports and analyses from stockbrokers
D. All of the given answers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.12 Describe the basic steps of benchmarking and explain how benchmarking can improve competitiveness
35.
Which of the following performance measures would be classified as a lag indicator for a coachline company whose objective was to
improve profitability?
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.08 Formulate a strategy map and a balanced scorecard for an organisation
36. One of the signs that a firm's performance measurement system is inadequate is when performance measures show
improvement but this is not translated into profit. In which of the following circumstances may this occur?
i. Resources freed up through improvements may not have been utilised to improve profitability.
ii. Factors being measured are not critical success factors.
iii. Too many similar measures are used.
iv. There is a time lag between improved performance and improved profitability.
A. i, ii and iii
B. ii, iii and iv
C. i, ii and iv
D. i, iii and iv
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.10 Explain why improving non-financial performance may not always lead to improved financial performance
37. Which of the following would be classified as a lead indicator for a bus company where customer satisfaction was their
objective?
A. Customer satisfaction measure
B. Number of new passengers per month
C. Number of bus accidents
D. Number of regular customers retained
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.08 Formulate a strategy map and a balanced scorecard for an organisation
38. In which of the following sectors has the balanced scorecard been widely used?
A. Not-for-profit
B. All of the sectors use balanced scorecards
C. Government
D. Business
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.09 Explain why balanced scorecard implementations are not always successful
39. According to the Du Pont chart, Return on Investment (ROI) links directly to:
A. Profit and revenues.
B. Revenues and costs.
C. Invested capital and revenues.
D. Profit and invested capital.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.10 Explain why improving non-financial performance may not always lead to improved financial performance
40. Organisations that aim to become and remain world-class will strive for:
A. continuous improvement.
B. greater profitability.
C. increased investment.
D. market leadership.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.11 Describe how continuous improvement can be built into a performance measurement system
41. Which of the following statements most correctly completes the following sentence that identifies some of the
limitations of traditional management accounting? 'Traditional management accounting focuses on '
A. financial performance measures, labour-related activity measures and cost elimination.
B. financial performance measures, volume-related activity measures and cost control.
C. non-financial performance measures, labour-related activity measures and cost elimination.
D. financial performance measures, labour-related activity measures, cost elimination, volume-related activity measures
and cost control.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.01 Explain why traditional financial performance measures alone are not sufficient for managing an organisation
42. Which of the following statements is most correct about the selection of performance measures?
A. The key stakeholders are the owners of the firm and therefore financial performance measures will always be the most
crucial.
B. In today's environment, firms are likely to have an appropriate mix of both financial and non-financial performance
measures.
C. In the modern manufacturing environment, it is likely that non-financial performance measures will replace financial
performance measures.
D. Because of the focus on critical success factors, it is likely that non-financial performance measures will replace
financial performance measures.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.01 Explain why traditional financial performance measures alone are not sufficient for managing an organisation
Learning Objective: 14.02 Explain the advantages that non-financial performance measures offer over financial measures
43. Assuming you must choose one measure only, which of the following non-financial performance indicators would most
likely be chosen to measure employee satisfaction?
A. Number of repeat orders
B. Percentage of absenteeism
C. Number of complaints about service
D. Percentage of idle time
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.03 Select appropriate forms of operational measures to assess different areas of operational performance
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
44. Assuming you must choose one measure only, which of the following non-financial performance indicators would most
likely be chosen to measure quality?
A. Number of repeat orders
B. Percentage of absenteeism
C. Machine downtime
D. Percentage of idle time
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.03 Select appropriate forms of operational measures to assess different areas of operational performance
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
45. Assuming you must choose one measure only, which of the following non-financial performance indicators would most
likely be chosen to measure satisfaction with delivery?
A. Number of repeat orders
B. Percentage of absenteeism
C. Number of complaints about service
D. Units produced
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.03 Select appropriate forms of operational measures to assess different areas of operational performance
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
46. Assuming you must choose one measure only, which of the following non-financial performance indicators would most
likely be chosen to measure productivity?
A. Units produced per month
B. Number of repeat orders
C. Percentage of absenteeism
D. Percentage of idle time
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.03 Select appropriate forms of operational measures to assess different areas of operational performance
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
47. Assuming you must choose one measure only, which of the following non-financial performance indicators would most
likely be chosen as a measure of the production process?
A. Number of repeat orders
B. Percentage of idle time
C. Percentage of absenteeism
D. Number of complaints about service
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.03 Select appropriate forms of operational measures to assess different areas of operational performance
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.03 Select appropriate forms of operational measures to assess different areas of operational performance
49. Which of the following statements about performance measures is most correct and complete?
A. Most financial performance measures are lead indicators.
B. Most financial performance measures are lag indicators.
C. All non-financial performance measures are lead indicators.
D. All non-financial performance measures are lag indicators.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.07 Demonstrate the cause-and-effect linkages between measures in a strategic performance measurement system
50. From the following statements about benchmarking, select the incorrect statement.
A. Benchmarking involves working towards best practice.
B. Benchmarking requires selection of a benchmarking partner.
C. Benchmarking requires measuring against another firm in exactly the same type of business.
D. Benchmarking involves continuous improvement.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.12 Describe the basic steps of benchmarking and explain how benchmarking can improve competitiveness
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
52. A firm using the balanced scorecard has included among its strategies 'to improve bottom-line profit we need to
improve working conditions'. Which of the following statements best describes the evaluation of the firm's success in
implementing the strategy?
A. It is impossible to determine whether the strategy has been successful.
B. The only way to measure success is to survey employees.
C. A number of performance evaluation measures will need to be put in place, but even with favourable results on those
measures, the firm cannot conclude that the profit resulted from the improvement in working conditions.
D. If managers can observe employees' motivation they will have a good idea of the success or otherwise of the strategy.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.07 Demonstrate the cause-and-effect linkages between measures in a strategic performance measurement system
Learning Objective: 14.10 Explain why improving non-financial performance may not always lead to improved financial performance
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.12 Describe the basic steps of benchmarking and explain how benchmarking can improve competitiveness
54. Which of the following comments best describes the appropriate application of benchmarking to a medium-sized
Australian company with a range of products and services specifically designed for local conditions and demands?
A. In the absence of a valid basis for comparison, benchmarking is unlikely to be informative in this case.
B. Benchmarking should be based on world best practice for the nearest equivalent organisation.
C. Efforts should be made to compare particular activities and processes with similar processes elsewhere, allowing for
differences in the business environment.
D. The use of benchmarking may inhibit originality in meeting the special features and unique needs of the firm's market.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.12 Describe the basic steps of benchmarking and explain how benchmarking can improve competitiveness
55. The management accountant at Kaster Furniture Makers decides to include the following measures on their balanced
scorecard (BSC): customer satisfaction, rework costs, on-time delivery, average shopfloor personnel qualification and
sales growth in local markets. These measures belong to which BSC perspectives?
A.
B.
Financial perspective Internal business process perspective
Sales growth in the local markets Rework costs
Customer perspective Learning and growth perspective
On-time delivery, customer satisfaction Average shopfloor personnel qualification
C.
Financial perspective Internal business process perspective
Rework costs On-time delivery
Customer perspective Learning and growth perspective
Sales growth in the local markets, customer satisfaction Average shopfloor personnel qualification
D.
Financial perspective Internal business process perspective
Sales growth in the local markets; Rework costs On time delivery; Average shopfloor personnel qualification
Customer perspective Learning and growth perspective
Customer satisfaction
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
56. The internal business process perspective of a balanced scorecard may contain which of the following set of
performance measures?
A. Sales force efficiency, percentage of warranty claims, number of employees completed internal training
B. Defect costs, employee satisfaction rating, number of customer complaints
C. Sales force efficiency, scrap costs, percentage of machine downtime
D. Number of incorrect deliveries to customers, production cycle time, profit margin
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
57. Which of the following is the most appropriate lead indicator in relation to 'customer satisfaction rating'?
A. Market share
B. Number of customer complaints
C. Percentage of on-time delivery
D. Sales growth
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
Learning Objective: 14.07 Demonstrate the cause-and-effect linkages between measures in a strategic performance measurement system
58. Which of the following is the most appropriate lag indicator in relation to 'customer satisfaction rating'?
A. Sales growth
B. Number of customer complaints
C. Percentage of employees with tertiary qualifications
D. Percentage of on-time delivery
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
Learning Objective: 14.07 Demonstrate the cause-and-effect linkages between measures in a strategic performance measurement system
59. Which of the following is the most appropriate lag indicator in relation to 'percentage of products passed final quality
inspection'?
A. Percentage of machine downtime
B. Number of customer complaints
C. Percentage of on-time delivery
D. Number of employees who completed quality training
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
60. Which of the following about a strategic performance measurement system (SPMS) is incorrect?
A. It is a system that focuses on translating a strategy into financial and non-financial measures.
B. SPMS requires linking performance measures in cause-and-effect relationships.
C. SPMS always require the development of a strategy map first, followed by a balanced scorecard.
D. SPMS can be used by non-profit organisations.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
61. Which of the following statements about the DuPont chart is incorrect?
A. It shows that return on investment can be decomposed into profit and costs.
B. It identifies lead indicators of revenue.
C. It identifies lead indicators of costs.
D. Its underlying assumption is that return on investment is the 'ultimate' goal.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.10 Explain why improving non-financial performance may not always lead to improved financial performance
62.
The balanced scorecard requires measures to 'cascade down' an organisation, this means:
A. Managers should start with the lag indicators and work downwards to identify lead indicators.
B. Managers should start with the lead indicators and work downwards to identify lag indicators.
C. Managers should produce reports that are highly aggregated and then allow users to 'drill down' each measure to find
more specific details. This avoids information overload.
D. Managers should ensure that objectives, performance measures and targets of organisational units and individual
managers are reflective of the objectives, performance measures and targets at the higher organisational levels.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
63. Echo Beetle is an interior design and renovation management firm. The customer perspective of Echo Beetle's
balanced scorecard contain these two measures: (1) client satisfaction rating and (2) percentage of projects completed
on-time. Which of the following are the most appropriate measures on Echo Beetle's internal business process
perspective?
A. Adherence to project schedule (%), number of projects that passed internal quality inspection
B. Machine down time, productivity
C. Product defects, number of customer complaints
D. Time employees spent on training, cost per project
AACSB: Reflective
Difficulty: Hard
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
Learning Objective: 14.07 Demonstrate the cause-and-effect linkages between measures in a strategic performance measurement system
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.04 Outline the limitations of relying on non-financial performance measures
65. Traditional performance systems
Indicate the limitations that may occur with traditional performance systems.
Traditional financial measures have limitations and are not sufficient to manage an organisation. The reasons include the following:
1 Financial performance measures emphasise only one perspective of performance. Businesses need to manage the determinants of
future financial performance, and this is where strategy plays a role. Senior management determines the strategies that will be
implemented to enable the business to achieve long-term goals.
Managers need a performance measurement system that assesses how well they perform across the full range of strategically
important areas, such as quality and delivery, as well as cost.
2 Traditional financial performance measures focus on the consequences, not the causes. Measures of profit, and its components,
costs and revenues describe the financial consequences of decisions and activities, not causes. They describe what has happened, not
why it has happened. They are too aggregated and they do not tell managers what needs fixing. Also, summary financial measures are
often reported at the end of each month, so they are not timely. Businesses cannot afford to wait that long.
3 Financial performance measures provide limited guidance for future actions. Financial measures do not allow managers to assess
areas that need to be developed for the organisation to be successful in the long term. For example, to ensure future growth, managers
need to determine how effectively they have invested in areas such as new product development, development of staff and actions to
ensure customer loyalty. Financial measures report on the financial outcomes of past decisions and actions.
4 Financial performance measures may encourage actions that decrease both shareholder and customer value. Financial measures
may encourage managers to achieve short-term financial performance at the expense of long-term performance. This happens
particularly when there is excessive pressure on managers to achieve short-term profit improvements, and where remuneration
systems are closely tied to short-term profit achievement. For example, managers can improve short-term performance by reducing
expenditure on new product development, quality initiatives, human resource development (including training), information systems,
and customer and market developments. While these spending cuts cause an immediate increase in profits, they can seriously erode
future profits and growth potential, and thus decrease shareholder value. Retaining outdated technology and systems can reduce
competitiveness, and a lack of attention to products, customers and the market can lead to a reduction in customer value and customer
loyalty, leaving a company open to competitive threats.
These limitations arise largely from the particular orientation of financial performance measurement systems—they focus on the
financial outcomes of past decisions and action, not on the determinants of those outcomes.
AACSB: Communication
Difficulty: Easy
Learning Objective: 14.01 Explain why traditional financial performance measures alone are not sufficient for managing an organisation
66.
AACSB: Communication
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.04 Outline the limitations of relying on non-financial performance measures
A balanced scorecard is an attempt to identify and report on performance measures for each important strategic area of the business.
In broad terms, it covers:
— Financial perspective; that is, financial outcomes of actions are measured with a view to establishing their impact on shareholder
value. Examples include return on investment, profit and cash flow.
— Customer perspective; that is, the measures that assess the impact of actions on customer value. Examples include customer
satisfaction, market share and number of new customers.
— Internal business perspective; that is, the operations of the organisation. Examples include short-term monitoring of the activities
associated with product design, marketing and production (production, upstream and downstream costs).
— Learning and growth; that is, the facilities that concentrate on the long-term growth and development of the organisation. Examples
include multi-skilling, absenteeism and new product developments commenced.
— Measures in each category include lead indicators (key performance drivers) and lag indicators (key performance indicators)
appropriately linked to critical success factors.
AACSB: Communication
Difficulty: Easy
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
68. Benchmarking
Explain the different ways in which benchmarking may be achieved and the limitations of each.
Internal benchmarking
Benchmarking between different business units in the same firm (e.g. car companies) will often benchmark between subsidiaries in
different countries that are essentially functioning in the same manner. However, this does not provide the world's best practice
benchmarks.
Competitive benchmarking
This is the most desirable form of benchmarking because it compares directly with competitors. However, it is difficult to obtain
comprehensive information about competitors and the comparison is often restricted to information in the public domain. This will
provide less reliable data for comparison. It is therefore more appropriate to compare specific activities where information is more
reliable.
Industry benchmarking
This involves comparison with firms with similar technologies and interests but only with those that do not compete directly. Thus, direct
comparison of performance measures and practices is possible. Clearly, this can be achieved where industries are localised, such as
the building industry. There is a high level of commonality and both parties will benefit from benchmarking.
Best-in-class or process benchmarking
This involves comparison, with any industry, of a common practice such as human resource management. However, these
comparisons should be treated with caution as the context of the two firms may make comparison difficult or misleading. Under these
circumstances, normalisation can take place; that is, removing the effect of factors that are outside the control of the organisation. This
may be difficult because assessing the effect of differences is often subjective.
AACSB: Communication
Difficulty: Easy
Learning Objective: 14.12 Describe the basic steps of benchmarking and explain how benchmarking can improve competitiveness
69. Identify and discuss the four main reasons why improved non-financial performance at an operational level may not
lead to improved profitability.
AACSB: Communication
Difficulty: Hard
Learning Objective: 14.10 Explain why improving non-financial performance may not always lead to improved financial performance
70. One of the limitations with the traditional accounting system is that it is common to measure current performance
against the previous year's performance, which is not an indicator that the business's performance is good enough.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.01 Explain why traditional financial performance measures alone are not sufficient for managing an organisation
71. The perspectives that are generally considered with the balanced scorecard are the same regardless of whether the
business is a profit or not-for-profit concern.
FALSE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.08 Formulate a strategy map and a balanced scorecard for an organisation
72. In production, the time taken to get materials and machinery ready for a run is termed set-up time.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.03 Select appropriate forms of operational measures to assess different areas of operational performance
73. Some of the measures that can be used for measuring competitiveness include market ratios, capital structure and
liquidity.
FALSE
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.03 Select appropriate forms of operational measures to assess different areas of operational performance
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
74. The Du Pont chart identifies linkages between key performance drivers, key performance indicators and financial
performance measures.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.10 Explain why improving non-financial performance may not always lead to improved financial performance
75. Strategy maps are useful for explaining the cause-and-effect relationships that link business processes and
resources.
FALSE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.06 Outline the purpose of a strategy map
76. As customer expectations increase and stronger competition, organisations have to continually improve their
performance to retain their competitive position.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.11 Describe how continuous improvement can be built into a performance measurement system
77. Quality and customer satisfaction are non-financial measures that can be drivers of future financial performance.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.07 Demonstrate the cause-and-effect linkages between measures in a strategic performance measurement system
78. One way of setting up a system of continuous improvement is to utilise benchmarking for comparing products
functions and activities.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.12 Describe the basic steps of benchmarking and explain how benchmarking can improve competitiveness
79. One disadvantage of non-financial measures is their inability to drive future financial performance.
FALSE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.02 Explain the advantages that non-financial performance measures offer over financial measures
80.
A criticism of non- financial measures it that over time a number of non-financial measures are replaced but the previous measure
continues to exist.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.04 Outline the limitations of relying on non-financial performance measures
Chapter 14 Testbank Summary
Category # of Questio
ns
AACSB: Communication 5
AACSB: Reflective 75
Difficulty: Easy 54
Difficulty: Hard 2
Difficulty: Medium 24
Learning Objective: 14.01 Explain why traditional financial performance measures alone are not sufficient for managin 9
g an organisation
Learning Objective: 14.02 Explain the advantages that non-financial performance measures offer over financial meas 4
ures
Learning Objective: 14.03 Select appropriate forms of operational measures to assess different areas of operational p 9
erformance
Learning Objective: 14.04 Outline the limitations of relying on non-financial performance measures 4
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard 25
Learning Objective: 14.06 Outline the purpose of a strategy map 2
Learning Objective: 14.07 Demonstrate the cause-and-effect linkages between measures in a strategic performance 10
measurement system
Learning Objective: 14.08 Formulate a strategy map and a balanced scorecard for an organisation 3
Learning Objective: 14.09 Explain why balanced scorecard implementations are not always successful 1
Learning Objective: 14.10 Explain why improving non-financial performance may not always lead to improved financia 10
l performance
Learning Objective: 14.11 Describe how continuous improvement can be built into a performance measurement syste 2
m
Learning Objective: 14.12 Describe the basic steps of benchmarking and explain how benchmarking can improve co 12
mpetitiveness
Chapter 15 Testbank
Student: ___________________________________________________________________________
6. A valuable method of assessing supplier performance is to use a supplier performance index. This index is calculated
by:
A. total purchase price total supplier costs
B. total supplier costs total purchase price
C. average purchase price average supplier costs
D. average supplier costs average purchase price
7. Which of the following are performance measures used by firms to assess their own performance in relation to
suppliers?
i. Percentage of orders processed by electronic means
ii. Number of expedited orders
iii. Response time to customer queries
iv. Reduction in the number of suppliers
A. i, ii and iii
B. ii, iii and iv
C. i, ii and iv
D. All of the given answers
14. Specialty Manufacturing requires 5400 gadgets per year for production. The firm decides to order 120 gadgets at a
time. The costs of ordering are $50 per order and carrying costs per gadget are $2. Annual ordering costs are:
A. $1296.
B. $2250.
C. $2940.
D. $2000.
15. Specialty Manufacturing requires 5400 gadgets per year for production. The firm decides to order 120 gadgets at a
time. The costs of ordering are $50 per order and carrying costs per gadget are $2. Annual carrying costs are:
A. $288.
B. $240.
C. $140.
D. None of the given answers
16. Specialty Manufacturing requires 5400 gadgets per year for production. The firm decides to order 120 gadgets at a
time. The costs of ordering are $50 per order and carrying costs per gadget are $2. The annual cost of the inventory policy
is:
A. $2370.
B. $1365.
C. $1584.
D. $2490.
17. Which of the following statements is/are correct?
i. The economic order quantity determines the optimum order size for individual inventory items.
ii. The economic order quantity cannot be used in a manufacturing organisation.
iii. The economic order quantity minimises the sum of the ordering and carrying costs.
A. i
B. ii
C. i and iii
D. All of the given answers
19.
A. 2000
B. 3000
C. 1133
D. 1414
20.
A. 490 units.
B. 346 units.
C. 424 units.
D. 692 units.
21. Lead time is:
A. the amount of time it takes to place an order.
B. the length of time it takes for goods to be received after an order is placed.
C. the length of time it takes for an item, in inventory, to be sold.
D. the length of time it takes to sell goods.
23. Artwright Graphics uses a special-purpose paper in 80 per cent of its jobs. The paper is purchased in l00-sheet
packages at a cost of $100 per package. Management estimates the cost of placing and receiving a typical order to be
$15 and the annual cost of carrying a package in inventory is $1.50. The firm uses 2600 packages each year and
production is constant all year. The lead time to receive an order is one week. No safety stock is kept. The reorder point
for the paper is:
A. 100 units.
B. 25 units.
C. 50 units.
D. 203 units.
24. James Bond Pty Ltd uses 960 tonnes of a particular chemical each year. Monthly usage fluctuates between 70 tonnes
and 90 tonnes. The lead time for each order is six weeks and the economic order quantity is 160 tonnes. The safety stock
for Bond's chemical would be:
A. 10 tonnes.
B. 20 tonnes.
C. 30 tonnes.
D. None of the given answers
25. The Wonderlust Retail Company Ltd experiences relatively constant demand of 24 000 units per year for one of its
products. The product, a coffee-making machine, costs the firm $30. Placing an order costs $200 and annual carrying
costs are $2 per unit. The firm works 200 days per year and desires a safety stock of 300 units. The lead time for an order
is 15 working days. The economic order quantity for Wonderlust is:
A. 1549.
B. 3098.
C. 2191.
D. 2221.
26. Which of the following is not an assumption underlying economic order quantity?
A. Demand is known and constant.
B. The order is delivered as needed.
C. On average one-half of inventory is in stock at any one time.
D. Acquisition cost per unit is constant.
27. Which of the following statements regarding a just-in-time (JIT) system are true?
i. Materials are purchased and goods are produced only as required.
ii. Employees are highly skilled at single tasks in order to maintain quality control.
iii. A JIT system is characterised by small lot sizes.
A. i and ii
B. i and iii
C. ii and iii
D. All of the given answers
29. Which of the following statements about just-in-time purchasing, compared with traditional purchasing systems, is/are
true?
A. Quality control by the supplier is more crucial.
B. Adherence to delivery schedules by the suppliers is more crucial.
C. Vendors can be dropped or added quickly.
D. Quality control by the supplier is more crucial AND adherence to delivery schedules by the suppliers is more crucial.
30. Which of the following statements regarding the pull method is/are true?
i. Goods are produced in each manufacturing stage only as they are needed at the next stage.
ii. This method reduces work-in-process inventory.
iii. This method reduces inventory handling and its associated non-value-added cost.
A. i and ii
B. i and iii
C. ii and iii
D. All of the given answers
32. Which of the following costs should be included in customer profitability analysis?
i. Product costs
ii. Distribution
iii. Customer servicing
iv. Finished goods inspection costs
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. i, ii and iv
33. Which of the following are customer costs at the market level?
i. Market research
ii. Regular sales calls
iii. Advertising campaigns
iv. Market development
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. All of the given answers
34. Which of the following are customer costs at the customer level?
i. Regular sales calls
ii. Customer inquiries
iii. Acceptance of sales order
iv. Provision of samples to customers
A. i, ii and iii
B. i, iii and iv
C. i, ii and iv
D. All of the given answers
36. Which of the following can have a negative impact on a customer's profitability?
A. Number of required sales contacts (phone calls, visits etc.)
B. Accounts receivable collection time
C. Purchase order amendments
D. All of the given answers
38. Under a backflush costing system, the journal entry to purchase raw materials on account is:
A. debit work in process and credit accounts payable.
B. debit raw materials and credit cash.
C. debit raw and in-process inventory and credit accounts payable.
D. debit cost of goods sold and credit accounts payable.
39. Which of the following statements regarding backflush costing is false?
A. Backflush costing is simpler and less expensive than traditional product costing.
B. Backflush costing provides more-detailed information than a job order costing system.
C. When using backflush costing, a cost-benefit decision needs to be made.
D. It is only likely to be used in an environment where production-related inventories are kept low.
41. The reason a just-in-time system focuses on the control of inventories is because:
A. they drive production lead times.
B. they are an expensive capital item for most firms.
C. they are what customers want.
D. they have non-value-added characteristics.
43. Select the statement that best completes the following sentence for all possible scenarios: 'Considering the entire
value chain is important for management accounting in today's competitive environment because '
A. the value chain actually extends back to suppliers and forward to customers.
B. production is only one very small part of the value chain.
C. traditional systems have focused on the engineered costs of production rather than the discretionary costs of the other
aspects of the value chain.
D. the study of all aspects and linkages in the chain may provide opportunities for cost reduction that are not evident when
focusing on one aspect only.
44. The analysis of the cost of products purchased and associated customer driven costs is known as:
A. customer profitability analysis.
B. supplier cost analysis.
C. customer cost analysis.
D. product contribution analysis.
45. Customer value is an important part of activity-based management and it enables an organisation to achieve both cost
reduction and improved customer value through the use of which of the following?
i. Identifying major opportunities for cost reduction.
ii. Determining root causes of these costs.
iii. Developing programs to eliminate the causes of these costs.
iv. Introducing performance measures to monitor the effect of these programs.
A. i, ii and iv
B. i, ii and iii
C. ii, iii and iv
D. All the given answers
46. Time-based management is concerned with the elimination of idle time, which generates non-value-added costs in
which of the following circumstances?
A. The buildup of inventories
B. Loss of customers
C. Delay in sales revenue generation
D. All of the given answers
49.
A. 4 days
B. 7 days
C. 10 days
D. 11 days
50.
A. 21 days
B. 7 days
C. 10 days
D. 13 days
51.
A. 4 days
B. 7 days
C. 13 days
D. 21 days
52.
A. 4 days
B. 7 days
C. 10 days
D. 13 days
53.
A. 4 days
B. 10 days
C. 13 days
D. 21 days
56.
Nonsuch Ltd wishes to know the break-even point on its product, ADV, and provides the following data.
A. 3
B. 4
C. 5
D. 6
GoGo Furniture needs to purchase glass panes to make glass top coffee tables. Last year GoGo Furniture had two suppliers, BolBol
and TolTol. Based on last year's experience with these two suppliers, GoGo provides you with the following supplier related information:
A. $1050
B. $4050
C. $6300
D. $7050
59.
GoGo Furniture needs to purchase glass panes to make glass top coffee tables. Last year GoGo Furniture has two suppliers, BolBol
and TolTol. Based on last year's experience with these two suppliers, GoGo provides you with the following supplier related information:
GoGo Furniture needs to purchase glass panes to make glass top coffee tables. Last year GoGo Furniture has two suppliers, BolBol
and TolTol. Based on last year's expernece with these two suppliers, GoGo provides you with the following supplier related information:
61. Doron Ltd has just computed the supplier performance index (SPI) of the company's two suppliers, Xema and Zetta.
Xema's SPI is 2.11 and Zetta's SPI is 0.99. Which of the following statements is correct?
A. Xema is a preferred supplier because it has a higher SPI than Zetta.
B. Xema is a preferred supplier because its SPI is greater than 1.0.
C. Both suppliers are considered poor quality suppliers, because their SPI is higher than 0.50.
D. The SPI indices suggest that for every $1 purchase price, Doron has to incur $2.11 supplier activity costs for Xema and
$0.99 activity costs for Zetta.
62.
A. $6000
B. $16 000
C. $24 500
D. $29 000
63.
A. $8500
B. $18 500
C. $30 500
D. $35 500
64.
A. $8500
B. $17 000
C. $21 500
D. $27 000
65. Which of the following set of measures are appropriate in monitoring 'customer retention'?
A. Proportion of sales from existing customers, number of repeat purchases, sales growth from customers using loyalty
cards
B. Customer satisfaction rating, number of repeat purchases, customer acquisition costs
C. Customer satisfaction rating, sales growth from customers using loyalty cards, customer profitability per quarter
D. Proportion of sales from existing customers, market share, profit attributable to customers in the 21-30 age group
66. Which of the following is a likely cause for a longer-than-expected production lead time?
A. The order was received later than expected.
B. The delivery truck has broken down on the way to the customer.
C. The order was lost after the customer sent it to the company.
D. There was excessive idle time in the production process.
67. A customer has placed an order with Cyborg Computers for a custom-made computer. However, as a result of a
system error, the order was lost. It took the sales representative three days to locate the order again. Once the order was
located, the sales representative sent the order to the production department. This error is likely to negatively affect which
of the following?
A. Production lead time and delivery time
B. Customer response time and order receipt time
C. Customer response time and delivery time
D. Order receipt time and delivery time
68. A formal agreement between organisations with the intention to share resources is known as a:
A. collaborative arrangement.
B. mutual agreement.
C. strategic alliance.
D. common objective.
69. A firm is likely to develop collaborative relationships with suppliers to help minimise supplier and inventory-related
costs when the strategic focus of the firm is:
A. growth leadership.
B. differentiation strategy.
C. segmentation strategy.
D. cost leadership.
70. When selecting new suppliers, which of the following would not be part of the selection criteria?
A. Supplier performance history
B. Cheapest price
C. Communication systems
D. Geographical location
71. The activity where there is an additional cost incurred by a buying firm as the result of a quality problem is known as:
A. a supplier level activity.
B. an order level activity.
C. a unit level activity.
D. an organisation level activity.
72.
If the total supplier activity costs were $74 000; price per unit was $1.70; and total units purchased were 12 000, the supplier
performance index would be:
A. 6.166.
B. 10.483.
C. 5.223.
D. 3.627.
73. The core customer measure at which an organisation attracts and wins new customers is known as customer:
A. acquisition.
B. satisfaction.
C. retention.
D. profitability.
74. Identify and define the five core customer measures. To support your answer, provide an example for each core
measure.
75. Highlight three approaches that illustrate how the growing use of e-commerce has had a major impact on the design
of business processes and accounting systems.
76. Explain how 'collaborative relationships' with suppliers are essential when the strategic focus of a firm is cost
leadership.
77. Explain the three levels of supplier activities and costs that are incurred by an organisation.
78. Explain why calculating customer profitability assists in the management of customer-driven costs.
79. The advantage of a just-in-time (JIT) system is that there are huge savings in costs relating to the holding of inventory
as JIT companies never hold inventories of any description.
True False
80. If time is not managed efficiently by companies, costs relating to a build-up of inventories and the rate at which
products are produced can get out of control.
True False
81. When a business wants to achieve efficiencies in supply chain management, they will often use software packages
called enterprise resource planning systems software that support information systems across a number of functions.
True False
82. Time-based management considers time and profitability as a main means for measuring performance.
True False
83. When calculating customer costs there are three levels of costs that must be considered―market level activities,
customer level activities and order level activities.
True False
84. Strategic alliances are informal arrangements between two or more suppliers and customers relating to the supply of
raw materials.
True False
85. The economic order quantity is influenced by carrying costs, annual requirements and the costs to place an order.
True False
86. The design of business processes and accounting systems have changed a lot over the past ten years due to the fact
that so many businesses are now using electronic commerce.
True False
87. When organisations assess their own performance in relation to suppliers, two of the measures they can use are the
response time to support queries and the number of suppliers or joint innovations generated.
True False
88. Organisations usually undertake a formal process to determine their preferred suppliers.
True False
89. When determining the total costs of purchasing, an organisation will include the costs of materials, inventory ordering,
selling and delivery.
True False
90. The pull system of production management is driven by the actual demands of the final customer.
True False
Chapter 15 Testbank Key
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.01 Describe supply chain management and how e-commerce technologies can be used to enhance performance
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.01 Describe supply chain management and how e-commerce technologies can be used to enhance performance
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.04 Use activity-based approaches to determine the total costs of dealing with and managing suppliers
4. Which of the following are examples of inventory holding costs?
i. Inwards inspection
ii. Rental
iii. Opportunity cost
iv. Insurance
A. i, ii and iii
B. ii, iii and iv
C. i, ii and iv
D. i, iii and iv
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.04 Use activity-based approaches to determine the total costs of dealing with and managing suppliers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.04 Use activity-based approaches to determine the total costs of dealing with and managing suppliers
6. A valuable method of assessing supplier performance is to use a supplier performance index. This index is calculated
by:
A. total purchase price total supplier costs
B. total supplier costs total purchase price
C. average purchase price average supplier costs
D. average supplier costs average purchase price
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.05 Select measures to evaluate supplier performance
7. Which of the following are performance measures used by firms to assess their own performance in relation to
suppliers?
i. Percentage of orders processed by electronic means
ii. Number of expedited orders
iii. Response time to customer queries
iv. Reduction in the number of suppliers
A. i, ii and iii
B. ii, iii and iv
C. i, ii and iv
D. All of the given answers
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.05 Select measures to evaluate supplier performance
8. What types of businesses usually hold significant quantities of inventory?
A. Manufacturing and wholesale
B. Wholesale and retail
C. Manufacturing, wholesale and retail
D. Retail, manufacturing and service
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
12. What kind of costs are transportation and receiving costs?
A. Ordering costs
B. Shortage costs
C. Carrying costs
D. Production costs
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
AACSB: Analytical
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
14. Specialty Manufacturing requires 5400 gadgets per year for production. The firm decides to order 120 gadgets at a
time. The costs of ordering are $50 per order and carrying costs per gadget are $2. Annual ordering costs are:
A. $1296.
B. $2250.
C. $2940.
D. $2000.
AACSB: Analytical
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
15. Specialty Manufacturing requires 5400 gadgets per year for production. The firm decides to order 120 gadgets at a
time. The costs of ordering are $50 per order and carrying costs per gadget are $2. Annual carrying costs are:
A. $288.
B. $240.
C. $140.
D. None of the given answers
AACSB: Analytical
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
16. Specialty Manufacturing requires 5400 gadgets per year for production. The firm decides to order 120 gadgets at a
time. The costs of ordering are $50 per order and carrying costs per gadget are $2. The annual cost of the inventory policy
is:
A. $2370.
B. $1365.
C. $1584.
D. $2490.
AACSB: Analytical
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
19.
A. 2000
B. 3000
C. 1133
D. 1414
AACSB: Analytical
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
20.
A. 490 units.
B. 346 units.
C. 424 units.
D. 692 units.
AACSB: Analytical
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
22. The reorder point is calculated by:
A. average usage safety stock + lead time.
B. average usage safety stock lead time.
C. average usage lead time + safety stock.
D. safety stock lead time + average usage.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
23. Artwright Graphics uses a special-purpose paper in 80 per cent of its jobs. The paper is purchased in l00-sheet
packages at a cost of $100 per package. Management estimates the cost of placing and receiving a typical order to be
$15 and the annual cost of carrying a package in inventory is $1.50. The firm uses 2600 packages each year and
production is constant all year. The lead time to receive an order is one week. No safety stock is kept. The reorder point
for the paper is:
A. 100 units.
B. 25 units.
C. 50 units.
D. 203 units.
AACSB: Analytical
Difficulty: Medium
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
24. James Bond Pty Ltd uses 960 tonnes of a particular chemical each year. Monthly usage fluctuates between 70 tonnes
and 90 tonnes. The lead time for each order is six weeks and the economic order quantity is 160 tonnes. The safety stock
for Bond's chemical would be:
A. 10 tonnes.
B. 20 tonnes.
C. 30 tonnes.
D. None of the given answers
AACSB: Analytical
Difficulty: Medium
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
25. The Wonderlust Retail Company Ltd experiences relatively constant demand of 24 000 units per year for one of its
products. The product, a coffee-making machine, costs the firm $30. Placing an order costs $200 and annual carrying
costs are $2 per unit. The firm works 200 days per year and desires a safety stock of 300 units. The lead time for an order
is 15 working days. The economic order quantity for Wonderlust is:
A. 1549.
B. 3098.
C. 2191.
D. 2221.
AACSB: Analytical
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
26. Which of the following is not an assumption underlying economic order quantity?
A. Demand is known and constant.
B. The order is delivered as needed.
C. On average one-half of inventory is in stock at any one time.
D. Acquisition cost per unit is constant.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
27. Which of the following statements regarding a just-in-time (JIT) system are true?
i. Materials are purchased and goods are produced only as required.
ii. Employees are highly skilled at single tasks in order to maintain quality control.
iii. A JIT system is characterised by small lot sizes.
A. i and ii
B. i and iii
C. ii and iii
D. All of the given answers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.07 Discuss the rationale underlying JIT systems, as well as their key features
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.07 Discuss the rationale underlying JIT systems, as well as their key features
29. Which of the following statements about just-in-time purchasing, compared with traditional purchasing systems, is/are
true?
A. Quality control by the supplier is more crucial.
B. Adherence to delivery schedules by the suppliers is more crucial.
C. Vendors can be dropped or added quickly.
D. Quality control by the supplier is more crucial AND adherence to delivery schedules by the suppliers is more crucial.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.07 Discuss the rationale underlying JIT systems, as well as their key features
30. Which of the following statements regarding the pull method is/are true?
i. Goods are produced in each manufacturing stage only as they are needed at the next stage.
ii. This method reduces work-in-process inventory.
iii. This method reduces inventory handling and its associated non-value-added cost.
A. i and ii
B. i and iii
C. ii and iii
D. All of the given answers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.07 Discuss the rationale underlying JIT systems, as well as their key features
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.07 Discuss the rationale underlying JIT systems, as well as their key features
32. Which of the following costs should be included in customer profitability analysis?
i. Product costs
ii. Distribution
iii. Customer servicing
iv. Finished goods inspection costs
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. i, ii and iv
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.09 Use activity-based methods to undertake customer profitability analysis
33. Which of the following are customer costs at the market level?
i. Market research
ii. Regular sales calls
iii. Advertising campaigns
iv. Market development
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. All of the given answers
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.09 Use activity-based methods to undertake customer profitability analysis
34. Which of the following are customer costs at the customer level?
i. Regular sales calls
ii. Customer inquiries
iii. Acceptance of sales order
iv. Provision of samples to customers
A. i, ii and iii
B. i, iii and iv
C. i, ii and iv
D. All of the given answers
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.09 Use activity-based methods to undertake customer profitability analysis
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.09 Use activity-based methods to undertake customer profitability analysis
36. Which of the following can have a negative impact on a customer's profitability?
A. Number of required sales contacts (phone calls, visits etc.)
B. Accounts receivable collection time
C. Purchase order amendments
D. All of the given answers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.09 Use activity-based methods to undertake customer profitability analysis
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.12 Recognise the difference between backflush costing and traditional costing, and account for cost flows using backflush
costing
38. Under a backflush costing system, the journal entry to purchase raw materials on account is:
A. debit work in process and credit accounts payable.
B. debit raw materials and credit cash.
C. debit raw and in-process inventory and credit accounts payable.
D. debit cost of goods sold and credit accounts payable.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.12 Recognise the difference between backflush costing and traditional costing, and account for cost flows using backflush
costing
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.12 Recognise the difference between backflush costing and traditional costing, and account for cost flows using backflush
costing
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.07 Discuss the rationale underlying JIT systems, as well as their key features
41. The reason a just-in-time system focuses on the control of inventories is because:
A. they drive production lead times.
B. they are an expensive capital item for most firms.
C. they are what customers want.
D. they have non-value-added characteristics.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.07 Discuss the rationale underlying JIT systems, as well as their key features
42. Select the best answer. Backflush costing is appropriate when:
A. both just-in-time (JIT) and activity-based costing (ABC) have been implemented.
B. JIT purchasing has been implemented.
C. both JIT production and JIT purchasing have been implemented.
D. reduced set-up times have resulted from JIT's introduction.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.12 Recognise the difference between backflush costing and traditional costing, and account for cost flows using backflush
costing
43. Select the statement that best completes the following sentence for all possible scenarios: 'Considering the entire
value chain is important for management accounting in today's competitive environment because '
A. the value chain actually extends back to suppliers and forward to customers.
B. production is only one very small part of the value chain.
C. traditional systems have focused on the engineered costs of production rather than the discretionary costs of the other
aspects of the value chain.
D. the study of all aspects and linkages in the chain may provide opportunities for cost reduction that are not evident when
focusing on one aspect only.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.01 Describe supply chain management and how e-commerce technologies can be used to enhance performance
44. The analysis of the cost of products purchased and associated customer driven costs is known as:
A. customer profitability analysis.
B. supplier cost analysis.
C. customer cost analysis.
D. product contribution analysis.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.08 Explain how customer relationship management (CRM) can be used to create long-term relationships with customers
45. Customer value is an important part of activity-based management and it enables an organisation to achieve both cost
reduction and improved customer value through the use of which of the following?
i. Identifying major opportunities for cost reduction.
ii. Determining root causes of these costs.
iii. Developing programs to eliminate the causes of these costs.
iv. Introducing performance measures to monitor the effect of these programs.
A. i, ii and iv
B. i, ii and iii
C. ii, iii and iv
D. All the given answers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.08 Explain how customer relationship management (CRM) can be used to create long-term relationships with customers
46. Time-based management is concerned with the elimination of idle time, which generates non-value-added costs in
which of the following circumstances?
A. The buildup of inventories
B. Loss of customers
C. Delay in sales revenue generation
D. All of the given answers
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.11 Explain how time-based management can be used to manage time drivers, cost and other sources of customer value
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.11 Explain how time-based management can be used to manage time drivers, cost and other sources of customer value
Difficulty: Easy
Learning Objective: 15.11 Explain how time-based management can be used to manage time drivers, cost and other sources of customer value
49.
A. 4 days
B. 7 days
C. 10 days
D. 11 days
AACSB: Analytical
Difficulty: Medium
Learning Objective: 15.11 Explain how time-based management can be used to manage time drivers, cost and other sources of customer value
50.
A. 21 days
B. 7 days
C. 10 days
D. 13 days
AACSB: Analytical
Difficulty: Medium
Learning Objective: 15.11 Explain how time-based management can be used to manage time drivers, cost and other sources of customer value
51.
A. 4 days
B. 7 days
C. 13 days
D. 21 days
AACSB: Analytical
Difficulty: Medium
Learning Objective: 15.11 Explain how time-based management can be used to manage time drivers, cost and other sources of customer value
52.
A. 4 days
B. 7 days
C. 10 days
D. 13 days
AACSB: Analytical
Difficulty: Medium
Learning Objective: 15.11 Explain how time-based management can be used to manage time drivers, cost and other sources of customer value
53.
A. 4 days
B. 10 days
C. 13 days
D. 21 days
AACSB: Analytical
Difficulty: Medium
Learning Objective: 15.11 Explain how time-based management can be used to manage time drivers, cost and other sources of customer value
54. Break-even time may be defined as:
A. the time from commencement of production of a new product to the point where sufficient profit has been generated to
repay the original investment.
B. the time from the original concept to the point where sufficient profit has been generated to repay the original
investment.
C. the time from the first delivery to a customer of a new product to the point where sufficient profit has been generated to
repay the original investment.
D. None of the given answers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.11 Explain how time-based management can be used to manage time drivers, cost and other sources of customer value
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.11 Explain how time-based management can be used to manage time drivers, cost and other sources of customer value
56.
Nonsuch Ltd wishes to know the break-even point on its product, ADV, and provides the following data.
A. 3
B. 4
C. 5
D. 6
AACSB: Analytical
Difficulty: Medium
Learning Objective: 15.11 Explain how time-based management can be used to manage time drivers, cost and other sources of customer value
57. Average cycle time is estimated by:
A. production time value of goods produced.
B. total processing time total number of units produced.
C. total processing time number of good units produced.
D. number of good units produced total processing time.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.11 Explain how time-based management can be used to manage time drivers, cost and other sources of customer value
58.
GoGo Furniture needs to purchase glass panes to make glass top coffee tables. Last year GoGo Furniture had two suppliers, BolBol
and TolTol. Based on last year's experience with these two suppliers, GoGo provides you with the following supplier related information:
A. $1050
B. $4050
C. $6300
D. $7050
AACSB: Analytical
Difficulty: Medium
Learning Objective: 15.04 Use activity-based approaches to determine the total costs of dealing with and managing suppliers
59.
GoGo Furniture needs to purchase glass panes to make glass top coffee tables. Last year GoGo Furniture has two suppliers, BolBol
and TolTol. Based on last year's experience with these two suppliers, GoGo provides you with the following supplier related information:
AACSB: Analytical
Difficulty: Medium
Learning Objective: 15.04 Use activity-based approaches to determine the total costs of dealing with and managing suppliers
60.
GoGo Furniture needs to purchase glass panes to make glass top coffee tables. Last year GoGo Furniture has two suppliers, BolBol
and TolTol. Based on last year's expernece with these two suppliers, GoGo provides you with the following supplier related information:
AACSB: Analytical
Difficulty: Medium
Learning Objective: 15.04 Use activity-based approaches to determine the total costs of dealing with and managing suppliers
61. Doron Ltd has just computed the supplier performance index (SPI) of the company's two suppliers, Xema and Zetta.
Xema's SPI is 2.11 and Zetta's SPI is 0.99. Which of the following statements is correct?
A. Xema is a preferred supplier because it has a higher SPI than Zetta.
B. Xema is a preferred supplier because its SPI is greater than 1.0.
C. Both suppliers are considered poor quality suppliers, because their SPI is higher than 0.50.
D. The SPI indices suggest that for every $1 purchase price, Doron has to incur $2.11 supplier activity costs for Xema and
$0.99 activity costs for Zetta.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.04 Use activity-based approaches to determine the total costs of dealing with and managing suppliers
62.
A. $6000
B. $16 000
C. $24 500
D. $29 000
AACSB: Analytical
Difficulty: Medium
Learning Objective: 15.09 Use activity-based methods to undertake customer profitability analysis
63.
A. $8500
B. $18 500
C. $30 500
D. $35 500
AACSB: Analytical
Difficulty: Medium
Learning Objective: 15.09 Use activity-based methods to undertake customer profitability analysis
64.
A. $8500
B. $17 000
C. $21 500
D. $27 000
AACSB: Analytical
Difficulty: Medium
Learning Objective: 15.09 Use activity-based methods to undertake customer profitability analysis
65. Which of the following set of measures are appropriate in monitoring 'customer retention'?
A. Proportion of sales from existing customers, number of repeat purchases, sales growth from customers using loyalty
cards
B. Customer satisfaction rating, number of repeat purchases, customer acquisition costs
C. Customer satisfaction rating, sales growth from customers using loyalty cards, customer profitability per quarter
D. Proportion of sales from existing customers, market share, profit attributable to customers in the 21-30 age group
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.10 Measure customer performance and understand the relationships between various customer performance measures
66. Which of the following is a likely cause for a longer-than-expected production lead time?
A. The order was received later than expected.
B. The delivery truck has broken down on the way to the customer.
C. The order was lost after the customer sent it to the company.
D. There was excessive idle time in the production process.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.11 Explain how time-based management can be used to manage time drivers, cost and other sources of customer value
67. A customer has placed an order with Cyborg Computers for a custom-made computer. However, as a result of a
system error, the order was lost. It took the sales representative three days to locate the order again. Once the order was
located, the sales representative sent the order to the production department. This error is likely to negatively affect which
of the following?
A. Production lead time and delivery time
B. Customer response time and order receipt time
C. Customer response time and delivery time
D. Order receipt time and delivery time
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.11 Explain how time-based management can be used to manage time drivers, cost and other sources of customer value
68. A formal agreement between organisations with the intention to share resources is known as a:
A. collaborative arrangement.
B. mutual agreement.
C. strategic alliance.
D. common objective.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.02 Recognise the value of creating collaborative relationships with suppliers
69. A firm is likely to develop collaborative relationships with suppliers to help minimise supplier and inventory-related
costs when the strategic focus of the firm is:
A. growth leadership.
B. differentiation strategy.
C. segmentation strategy.
D. cost leadership.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.02 Recognise the value of creating collaborative relationships with suppliers
70. When selecting new suppliers, which of the following would not be part of the selection criteria?
A. Supplier performance history
B. Cheapest price
C. Communication systems
D. Geographical location
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.03 Explain the criteria that may be used to select suppliers
71. The activity where there is an additional cost incurred by a buying firm as the result of a quality problem is known as:
A. a supplier level activity.
B. an order level activity.
C. a unit level activity.
D. an organisation level activity.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.04 Use activity-based approaches to determine the total costs of dealing with and managing suppliers
72.
If the total supplier activity costs were $74 000; price per unit was $1.70; and total units purchased were 12 000, the supplier
performance index would be:
A. 6.166.
B. 10.483.
C. 5.223.
D. 3.627.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.05 Select measures to evaluate supplier performance
73. The core customer measure at which an organisation attracts and wins new customers is known as customer:
A. acquisition.
B. satisfaction.
C. retention.
D. profitability.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.10 Measure customer performance and understand the relationships between various customer performance measures
74. Identify and define the five core customer measures. To support your answer, provide an example for each core
measure.
AACSB: Communication
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.10 Measure customer performance and understand the relationships between various customer performance measures
75. Highlight three approaches that illustrate how the growing use of e-commerce has had a major impact on the design
of business processes and accounting systems.
E-commerce is the conduct of business transactions using electronic media, such as the internet. It often involves the buying and
selling of goods and services over the internet. It can also include the exchange of data between organisations and any transactions
that are conducted electronically.
E-commerce technologies may be used to create electronic linkages with the suppliers and customers who are part of an
organisation's supply chain. The term B2B (or business-to-business) refers to e-commerce activities that take place between a
business and its suppliers and customers. In the case of suppliers, these activities include purchasing and procurement, supplier
selection and management, and inventory management. For customers, they include internet-based systems for customer inquiries,
ordering, payments and support. Such technologies may lead to enhanced communications and coordination across the supply chain—
between the organisation and its suppliers and customers, and within the organisation itself.
Business-to-business activities may utilise electronic data interchange (EDI), which is the direct linking of parts of an organisation's
computer system with that of its customers and suppliers. For example, a computer link between a wholesaler and its retail customers
may allow the wholesaler to analyse customers' daily sales activity and to determine when customers require additional inventory.
Customers also gain from these systems, as they receive products as soon as they need them from their suppliers without having to
incur the costly activities of raising and processing purchase orders.
The term B2C (or business-to-consumer) refers to e-commerce exchanges between a business and its non-business customers.
This area of e-commerce has grown dramatically in recent years as customers embrace online shopping and banking. Customers may
purchase and pay for products and services, make sales inquiries, and search for and receive customer support and assistance, all
online.
Within a firm, enterprise resource planning (ERP) systems may assist an organisation to achieve efficient supply chain
management. Despite its name, ERP systems do not focus specifically on planning. Rather, they are complex software packages that
support information systems that span many different functional areas of an organisation. Thus, areas as diverse as accounts payable,
accounts receivable, human resource management, purchasing, inventory management and the general ledger may be integrated
within an ERP system, and operate off integrated databases. Examples of popular ERP systems that are used by Australian and
overseas companies include SAP, Peoplesoft and Oracle. Enterprise resource planning systems are very expensive to implement
successfully and are, therefore, more suited to larger organisations. They provide the advantages of consistency and standardisation of
data definitions and business processes across an organisation, more efficient retrieval of information for managers' decisions, and
electronic access and data sharing across an organisation. Enterprise resource planning systems may also include e-commerce
capabilities, to allow suppliers and customers, to engage in online transactions and to gain access to relevant data.
AACSB: Communication
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.01 Describe supply chain management and how e-commerce technologies can be used to enhance performance
76. Explain how 'collaborative relationships' with suppliers are essential when the strategic focus of a firm is cost
leadership.
As purchased material and components can make up a large proportion of the cost of producing a product, many organisations realise
the importance of carefully selecting suppliers and creating and managing collaborative relationships with them.
Collaborative relationships with suppliers can help minimise supplier and inventory-related costs, which is particularly relevant if the
strategic focus of the firm is cost leadership. Manufacturers' product quality may also be enhanced, and production lead time improved,
which is consistent with a product differentiation strategy. Production lead time, or cycle time, is the period from when an order enters
the manufacturing department to when the finished products are ready for delivery
Many companies direct considerable effort into developing and strengthening supplier relationships. For example, Australian motor
vehicle manufacturers such as Toyota and Ford have worked at developing such relationships, and in some cases have created
strategic alliances with key suppliers.
Strategic alliances are formal agreements between two or more organisations to share resources in order to achieve common
objectives. The objectives may include joint product development, outsourcing of information technology or distribution services, the
introduction of quality manufacturing practices in suppliers and joint construction projects.
AACSB: Communication
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.02 Recognise the value of creating collaborative relationships with suppliers
77. Explain the three levels of supplier activities and costs that are incurred by an organisation.
1 Unit level activities are additional activities that occur as a result of problems related to faulty quality or late delivery of materials by a
particular supplier. These activities will lead to internal failure costs (such as the cost of extra machine set-ups, rework of products and
scrap) and external failure costs (the costs of replacing a faulty product that a customer has purchased that has failed owing to faulty
materials from a particular supplier). Internal and external failure costs are discussed further in Chapter 16.
2 Order level activities are triggered each time an order is placed with a particular supplier, and are independent of the number of units
in an order. These activities are those involved in ordering material from a supplier, receiving and inspecting an order once it is
delivered, and processing and paying a supplier's invoice.
3 Supplier level activities are activities that are incurred over the course of a supplier contract. They are independent of supplier orders,
or the materials that are supplied. These activities include undertaking a quality audit to evaluate the supplier, the employment of a
dedicated purchasing manager to manage the relationship with the supplier, and research and development activities that relate
specifically to a supplier. Quality audits occur when the purchasing staff of a buyer organisation visit a supplier to undertake an
appraisal of quality processes and systems. Research and development activities may be undertaken by a buying organisation to
understand how a supplier's components can be used in manufacturing processes. The type of supplier-level activities undertaken by a
buyer may be different for each supplier. For example, a buyer may consider that some suppliers provide such high quality materials
that quality audits do not need to be undertaken. Also, some suppliers may choose to undertake the research and development
activities themselves.
AACSB: Communication
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.04 Use activity-based approaches to determine the total costs of dealing with and managing suppliers
78. Explain why calculating customer profitability assists in the management of customer-driven costs.
In many businesses, customer-driven costs are a growing proportion of total costs, and the resources expended on particular
customers or groups of customers may vary widely. For example, in the computer software industry, a large proportion of costs are
incurred after the point of sale, and include providing technical support to customers and solving their problems. These costs may be
associated with particular customers or customer groups, not with the products that they purchase.
Customer profitability analysis can be used to address questions such as:
1. Which customers generate the greatest profits? And how can we retain those customers?
2. Which customers generate the lowest profits? And what can we do to make those customers more profitable?
3. On which types of customers should we focus our business efforts in order to maximise profitability?
Customer profitability analysis can lead to insightful perspectives. A manufacturing company may find that it is more expensive (per unit
of product) to deal with small individual customers than with large distributors, so management may decide to encourage the smaller
customers to purchase from the distributors rather than buy direct from the manufacturer. This may help the company to improve its
cost performance relative to that of its competitors. Alternatively, the manufacturer may look for ways of reducing the costs of servicing
the smaller customers without reducing the level of service.
Customer profitability analysis provides a different perspective on the profitability of the business from that provided by product
profitability and allows managers to make a series of strategic decisions about which customers, markets or distribution channels to
focus on. It also helps to identify areas for cost control and cost reduction.
AACSB: Communication
Difficulty: Medium
Learning Objective: 15.09 Use activity-based methods to undertake customer profitability analysis
79. The advantage of a just-in-time (JIT) system is that there are huge savings in costs relating to the holding of inventory
as JIT companies never hold inventories of any description.
FALSE
AACSB: Reflective
Difficulty: Medium
Learning Objective: 15.11 Explain how time-based management can be used to manage time drivers, cost and other sources of customer value
80. If time is not managed efficiently by companies, costs relating to a build-up of inventories and the rate at which
products are produced can get out of control.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.11 Explain how time-based management can be used to manage time drivers, cost and other sources of customer value
81. When a business wants to achieve efficiencies in supply chain management, they will often use software packages
called enterprise resource planning systems software that support information systems across a number of functions.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.01 Describe supply chain management and how e-commerce technologies can be used to enhance performance
82. Time-based management considers time and profitability as a main means for measuring performance.
FALSE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.11 Explain how time-based management can be used to manage time drivers, cost and other sources of customer value
83. When calculating customer costs there are three levels of costs that must be considered―market level activities,
customer level activities and order level activities.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.09 Use activity-based methods to undertake customer profitability analysis
84. Strategic alliances are informal arrangements between two or more suppliers and customers relating to the supply of
raw materials.
FALSE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.02 Recognise the value of creating collaborative relationships with suppliers
85. The economic order quantity is influenced by carrying costs, annual requirements and the costs to place an order.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.06 Explain the principles underlying traditional inventory management and use the EOQ formula to calculate the optimal order
quantity
86. The design of business processes and accounting systems have changed a lot over the past ten years due to the fact
that so many businesses are now using electronic commerce.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.01 Describe supply chain management and how e-commerce technologies can be used to enhance performance
87. When organisations assess their own performance in relation to suppliers, two of the measures they can use are the
response time to support queries and the number of suppliers or joint innovations generated.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.05 Select measures to evaluate supplier performance
88. Organisations usually undertake a formal process to determine their preferred suppliers.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.03 Explain the criteria that may be used to select suppliers
89. When determining the total costs of purchasing, an organisation will include the costs of materials, inventory ordering,
selling and delivery.
FALSE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.04 Use activity-based approaches to determine the total costs of dealing with and managing suppliers
90. The pull system of production management is driven by the actual demands of the final customer.
FALSE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 15.07 Discuss the rationale underlying JIT systems, as well as their key features