Managerial Accounting, 16e (Garrison)
Chapter 11: Performance Measurement in Decentralized Organizations
1) Return on investment (ROI) equals margin multiplied by sales.
2) When used in return on investment (ROI) calculations, turnover equals sales divided by
average operating assets.
3) Net operating income is income before interest and taxes.
4) An advantage of using ROI to evaluate performance is that it encourages the manager to
reduce the investment in operating assets as well as increase net operating income.
5) All other things the same, an increase in unit sales will normally result in an increase in the
return on investment.
6) The use of return on investment (ROI) as a performance measure may lead managers to reject
a project that would be favorable for the company as a whole.
7) Land held for possible plant expansion would be included as an operating asset when
computing return on investment (ROI).
8) A change in sales has no effect on margin and turnover.
9) Suppose a company evaluates divisional performance using both ROI and residual income.
The company’s minimum required rate of return for the purposes of residual income calculations
is 12%. If a division has a residual income of $6,000, then its ROI is less than 12%.
10) If a company contains a number of investment centers of differing sizes, return on
investment (ROI) should be used rather than residual income to rank the financial performance
of the divisions.
11) ROI and residual income are tools used to evaluate managerial performance in investment
centers.
12) Residual income should be used to evaluate an investment center rather than a cost or profit
center.
13) Residual income can be used most effectively in comparing the performance of divisions of
different size.
14) Residual income is the difference between net operating income and the product of average
operating assets and the minimum rate of return.
15) Move time is considered non-value-added time.
16) If the MCE is equal to 0.6, then 60% of the time a unit is in process is spent on activities
that add value to the product.
17) A manager would generally like to see a trend indicating a decrease in setup time.
18) Throughput time is the amount of time required to move a completed unit from the factory
floor to the warehouse.
19) A manufacturing cycle efficiency (MCE) ratio of less than 1.00 is desirable because this is
the ratio of non-value-added time to throughput time.
20) A manufacturing cycle efficiency (MCE) of less than one is impossible.
21) Queue time is considered non-value-added time.
22) Inspection Time is generally considered to be value-added time.
23) A balanced scorecard consists of a report showing a performance measure such as ROI or
residual income for all of the divisions in a company that generate profits.
24) If a strategy is not working, it should become evident on the balanced scorecard when some
of the predicted effects don’t occur.
25) Financial measures such as ROI are generally better than nonfinancial measures of key
success drivers such as customer satisfaction as leading indicators of future financial
performance.
26) In essence, a balanced scorecard lays out a theory of how the company can take concrete
actions to attain its desired outcomes. The strategy should seem plausible, but it should be
regarded as only a theory.
27) The performance measures on a balanced scorecard tend to fall into four groups: financial
measures, customer measures, internal business process measures, and learning and growth
measures.
28) Financial measures such as ROI and residual income as well as operating measures may be
included in a balanced scorecard.
29) A balanced scorecard contains both customer and internal business process performance
measures because improvements in internal business process should result in improvements in
customer satisfaction.
30) Incentive compensation for employees, such as bonuses, should be tied to balanced
scorecard performance measures only if managers are confident that the performance measures
are easily manipulated by those being evaluated.
31) If the balanced scorecard is correctly constructed, the performance measures should be
independent of each other so that bad performance on one measure will not result in bad
performance on another performance measure.
32) Financial measures tend to be lag indicators that report on the results of past actions.
33) If improvement in a performance measure on a balanced scorecard should lead to
improvement in another performance measure, but does not, then employees must work harder.
34) A profit center is responsible for generating revenue, but it is not responsible for controlling
costs.
35) A cost center is a responsibility center.
36) The basic objective of responsibility accounting is to charge each manager with those costs
and/or revenues over which he has control.
37) Under a responsibility accounting system, fewer expenses are charged against managers the
higher one moves upward in an organization.
38) Which of the following would not be included in operating assets in return on investment
calculations?
A) Cash.
B) Accounts Receivable.
C) Equipment
D) Factory building rented to (and occupied by) another company.
39) Which of the following would be an argument for using the gross cost of plant and
equipment as part of operating assets in return on investment computations?
A) It is consistent with the computation of net operating income, which includes depreciation as
an operating expense.
B) It is consistent with the balance sheet presentation of plant and equipment.
C) It eliminates the age of equipment as a factor in ROI computations.
D) It discourages the replacement of old, worn-out equipment because of the dramatic, adverse
effect on ROI.
40) Which of the following will not result in an increase in return on investment (ROI), assuming
other factors remain the same?
A) A reduction in expenses.
B) An increase in net operating income.
C) An increase in operating assets.
D) An increase in sales.
41) Some investment opportunities that should be accepted from the viewpoint of the entire
company may be rejected by a manager who is evaluated on the basis of:
A) return on investment.
B) residual income.
C) contribution margin.
D) segment margin.
42) Which of the following would be considered an operating asset in return on investment
computations?
A) Land being held for plant expansion.
B) Treasury stock.
C) Accounts receivable.
D) Common stock.
43) Which of the following segment performance measures will decrease if there is an increase
in the interest expense for that segment?
Return on Investment
Residual Income
A)
Yes
Yes
B)
No
Yes
C)
Yes
No
D)
No
No
–
A) Choice A
B) Choice B
C) Choice C
D) Choice D
44) Which of the following performance measures will increase if inventory decreases and all
else remains the same?
Return on Investment
Residual Income
A)
Yes
Yes
B)
No
Yes
C)
Yes
No
D)
No
No
–
A) Choice A
B) Choice B
C) Choice C
D) Choice D
45) All other things equal, which of the following would increase a division’s residual income?
A) Increase in expenses.
B) Decrease in average operating assets.
C) Increase in minimum required return.
D) Decrease in net operating income.
46) Which of the following measures of performance encourages continued expansion by an
investment center so long as it is able to earn a return in excess of the minimum required return
on average operating assets?
A) return on investment
B) transfer pricing
C) the contribution approach
D) residual income
47) Which of the following will increase a company’s manufacturing cycle efficiency (MCE)?
Decrease in Inspection Time
Decrease in Queue Time
A)
Yes
Yes
B)
Yes
No
C)
No
Yes
D)
No
No
–
A) Choice A
B) Choice B
C) Choice C
D) Choice D
48) A segment of a business responsible for both revenues and expenses would be called:
A) a cost center.
B) an investment center.
C) a profit center.
D) residual income.
49) Othman Inc. has a $800,000 investment opportunity with the following characteristics:
Sales
$
2,240,000
Contribution margin ratio
50
% of sales
Fixed expenses
$
1,008,000
–
The margin for this investment opportunity is closest to:
A) 50.0%
B) 45.0%
C) 5.0%
D) 55.0%
Contribution margin (50% × $2,240,000)
$
1,120,000
Fixed expenses
1,008,000
Net operating income
$
–
50) Runyon Inc. reported the following results from last year’s operations:
Sales
$
16,800,000
Variable expenses
12,230,000
Contribution margin
4,570,000
Fixed expenses
3,394,000
Net operating income
$
1,176,000
–
The company’s average operating assets were $7,000,000.
Last year’s turnover was closest to:
A) 0.42
B) 14.29
C) 0.07
D) 2.40
51) Tennill Inc. has a $1,400,000 investment opportunity with the following characteristics:
Sales
$
4,480,000
Contribution margin ratio
40
% of sales
Fixed expenses
$
1,657,600
–
The ROI for this year’s investment opportunity considered alone is closest to:
A) 8.1%
B) 128.0%
C) 3.0%
D) 9.6%
Contribution margin (40% × $4,480,000)
$
1,792,000
Fixed expenses
1,657,600
Net operating income
$
–
52) Youns Inc. reported the following results from last year’s operations:
Sales
$
10,500,000
Variable expenses
6,610,000
Contribution margin
3,890,000
Fixed expenses
3,260,000
Net operating income
$
630,000
–
The company’s average operating assets were $5,000,000.
At the beginning of this year, the company has a $1,400,000 investment opportunity that
involves sales of $2,800,000, fixed expenses of $616,000, and a contribution margin ratio of
30% of sales.
If the company pursues the investment opportunity and otherwise performs the same as last year,
the combined turnover for the entire company will be closest to:
A) 9.50
B) 1.64
C) 2.66
D) 2.08