Cost Accounting, 15e Global Edition (Horngren/Datar/Rajan)
Chapter 23 Performance Measurement, Compensation, and Multinational
Considerations
Objective 23.1
1) A report that measures financial and nonfinancial performance measures for various organization
units in a single report is called a(n) ________.
A) balanced scorecard
B) financial report scorecard
C) goal-congruence report
D) investment success report
2) Customer-satisfaction measures are an example of the ________.
A) goal-congruence approach
B) balanced scorecard approach
C) financial report scorecard approach
D) investment success approach
3) An example of a performance measure with a long time horizon is ________.
A) direct materials efficiency variances
B) overhead spending variances
C) number of new patents developed
D) quality of room service
4) Average number of repeat visits in a spa unit is a ________ measure on a balanced scorecard.
A) customer perspective
B) financial perspective
C) learning-and-growth perspective
D) internal-business-process perspective
5) Which of the following steps in designing an accounting-based performance measure includes
decisions such as defining assets as total assets or net assets in the calculation of return on assets?
A) choosing performance measures that align with top management’s financial goals
B) choosing the time horizon of each performance measure
C) choosing the details for each performance measure
D) choosing a target level of performance
6) Which of the following steps in designing an accounting-based performance measure includes
decisions of selecting net income as a measure of financial performance?
A) choosing performance measures that align with the firm’s financial goals
B) choosing the time horizon of each performance measure
C) choosing the details for each performance measure
D) choosing a target level of performance
7) Which of the following is true about designing an accounting-based performance measure?
A) The decisions made in steps are followed in a hierarchial order.
B) The issues considered in each step are independent.
C) Management’s beliefs are not required during the analyses.
D) Behavioral criteria are important when evaluating the steps.
8) Many common performance measures, such as customer satisfaction, rely on internal financial
accounting information.
9) Some companies present financial and nonfinancial performance measures for various organization
units in a single report called the balanced scorecard.
10) The balanced scorecard in most organizations is broken down into the following categories:
commercial perspective, supplier perspective, external business-process perspective, and productivity
perspective.
11) The first step in designing accounting based performance measures is to choose a target level of
performance and feedback mechanism.
12) Assume you are evaluating a manufacturing company. Match the various organizational activities
and concepts with the performance measures listed. Some items may have more than one match.
Activities:
1. Change in revenues
2. Cycle time
3. Economic order quantity
4. Manufacturing defects
5. Market share
6. New products
7. On-time delivery
8. Operating income
9. Product reliability
10. Time-to-market
Performance measure:
________ a. Profitability
________ b. Customer satisfaction
________ c. Innovation
________ d. Efficiency, quality, and time
13) Make a list of steps of designing an accounting based performance measure. Give example of
decisions taken under each step.
14) When designing the steps in accounting-based performance measures, should the decisions in these
steps be sequential?
15) Companies are increasingly using nonfinancial measures to evaluate performance. Why? Since these
numbers do not come from the company’s financial records, why are they used?
Objective 23.2
1) Managers usually use the return on investment to evaluate ________.
A) the performance of a subdivision
B) the accounting principles followed
C) the size of the investment
D) the balance of working capital
2) The return on investment is usually considered the most popular approach to measure performance
because ________.
A) it blends all the ingredients of profitability into a single percentage
B) once determined, there is no need to use it with other measures of performance
C) it throws light on the company’s working capital
D) it measures the cash balance of the company in the most efficient manner
3) Return on investment can be increased by ________.
A) increasing current assets
B) decreasing total assets
C) decreasing revenues
D) increasing the debt portion of the capital
4) The ________ method of profitability analysis recognizes the two basic ingredients in profit-making:
increasing income per dollar of revenues and using assets to generate more revenues.
A) Balanced Scorecard
B) Residual-Income
C) DuPont
D) Economic Value Added
5) Aaron Corp’s net income is $25,000. What is the amount of the investment if the return on investment
is 20%?
A) $50,000
B) $100,000
C) $125,000
D) $250,000
6) Zenith Corporation’s net income is $78,400. What is the return on investment if the amount of the
investment is $500,000?
A) 14.88%
B) 12.78%
C) 15.68%
D) 16%
7) Bouvous Corporation had the following information for 2015:
Revenue $ 400,000
Operating expenses 350,000
Total assets 500,000
What is the return on investment?
A) 10%
B) 20%
C) 25%
D) 18.2%
8) Aeralia Inc., has two regional offices. The data for each are as follows:
Maryland New Jersey
Revenues $ 290,000 $ 298,000
Operating assets 2,500,000 4,500,000
Net operating income 1,000,000 1,200,000
What is the Maryland Division’s return on investment?
A) 40%
B) 54%
C) 12%
D) 3.57%
9) Bouvous Corp has two regional offices. The data for each are as follows:
Maryland New Jersey
Revenues $ 290,000 $ 300,000
Operating assets 2,400,000 4,500,000
Net operating income 1,008,000 1,500,000
What is the return on investment for the New Jersey Division?
A) 21%
B) 33.33%
C) 66.67%
D) 25%
Answer the following questions using the information below:
The Cybertronics Corporation reported the following information for its Cyclotron Division:
Revenues $2,000,000
Operating costs 1,200,000
Operating assets 1,000,000
Income is defined as operating income.
10) What is the Cyclotron Division’s investment turnover ratio?
A) 2.00
B) 3.33
C) 2.50
D) 0.80
11) What is the Cyclotron Division’s return on sales?
A) 20%
B) 40%
C) 50%
D) 60%
12) What is the Cyclotron Division’s return on investment?
A) 35%
B) 75%
C) 50%
D) 80%
Answer the following questions using the information below:
The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a
flood that destroyed some of their accounting records. The main computer system was also severely
damaged. The following information was salvaged:
Alpha Division Beta Division Gamma Division
Sales $5,500,000 (a) $2,500,000
Net operating income $3,500,000 $1,100,000 $ 1,200,000
Operating assets (b) (c) $1,600,000
Return on investment 0.25 0.15 (d)
Return on sales (e) 0.10 0.5
Investment turnover (f) (g) 1.5
13) What were the sales for the Beta Division (a)?
A) $8,666,667
B) $11,904,760
C) $11,000,000
D) $14,303,600
14) What is the value of the operating assets belonging to the Alpha Division (b)?
A) $8,666,667
B) $14,000,000
C) $13,000,000
D) $14,303,600
15) What is the value of the operating assets belonging to the Beta Division (c)?
A) $7,333,333
B) $11,904,760
C) $8,333,333
D) $14,303,600
16) What is the Gamma Division‘s return on investment (d)?
A) 0.25
B) 0.45
C) 0.60
D) 0.75
17) What is the Alpha Division’s return on sales (e)?
A) 60%
B) 65%
C) 63.64%
D) 53.63%
Answer the following questions using the information below:
The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is
attempting to recover from a fire that destroyed some of their accounting records. The main computer
system was also severely damaged. The following information was salvaged:
Tractor Division Tiller Division Digger Division
Sales $10,000,000 (a) $2,400,000
Net operating income $ 1,000,000 $1,440,000 $ 600,000
Operating assets (b) (c) $ 2,000,000
Return on investment 0.20 0.10 (d)
Return on sales (e) 0.12 0.25
Investment turnover (f) (g) 1.2
18) What were the sales for the Tiller Division?
A) $9,600,000
B) $12,000,000
C) $15,000,000
D) $15,500,000
19) What is the value of the operating assets belonging to the Tractor Division?
A) $ 3,500,000
B) $4,000,000
C) $4,500,000
D) $5,000,000
20) What is the value of the operating assets belonging to the Tiller Division?
A) $ 10,000,000
B) $ 12,000,000
C) $ 14,400,000
D) $ 15,000,000
21) What is the Digger Division’s return on investment?
A) .25
B) .30
C) .45
D) .60
22) What is the Tractor Division’s return on sales?
A) 0.10
B) 0.12
C) 0.15
D) 0.20
23) What is the Tractor Division’s investment turnover?
A) .50
B) 1.0
C) 2.0
D) 2.5
24) What is the Tiller Division’s investment turnover?
A) .50
B) .833
C) 1.2
D) 1.5
25) The weighted-average cost of capital (WACC) equals ________.
A) the after-tax average cost of all the long-term and short-term funds
B) the after-tax average cost of all the long-term funds
C) the pre-tax average cost of all the short-term funds
D) the pre-tax average cost of all the long-term and short-term funds
26) The required rate of return multiplied by the investment is the ________.
A) sunk cost of the investment
B) historical cost of the investment
C) imputed cost of the investment
D) return on sales
27) A company which favors the residual income approach wants managers to ________.
A) concentrate on maximizing an absolute amount of dollars
B) concentrate on maximizing a percentage return
C) maximize the investment turnover ratio
D) maximize return on sales
28) Using residual income as a measure of performance rather than return on investment promotes goal
congruence because residual income ________.
A) places importance on the reduction of underperforming assets
B) calculates a percentage return rather than an absolute return
C) concentrates on maximizing an absolute amount of dollars
D) concentrates on maximizing the return on sales
29) Which of the following is a performance measure?
A) retained earnings
B) market value
C) present value of cash flows
D) economic value added
30) Return on investment is also known as the ________.
A) net present value
B) accounting rate of return
C) residual income
D) economic value added
Answer the following questions using the information below:
Care Inc., has two divisions that operate independently of one another. The financial data for the year
2015 reported the following results:
North South
Sales $6,000,000 $5,000,000
Operating income 1,500,000 1,200,000
Taxable income 1,200,000 700,000
Investment 14,000,000 10,000,000
The company’s desired rate of return is 10%. Income is defined as operating income.
31) What are the respective return-on-investment ratios for the North and South Divisions?
A) 10.00% and 15.00%
B) 11.71% and 14.00%
C) 10.71% and 12.00%
D) 12.50% and 15.00%
32) What are the respective residual incomes for the North and South Divisions?
A) $60,000 and $100,000
B) $300,000 and $60,000
C) $300,000 and $100,000
D) $100,000 and $200,000
33) Which division has the best return on investment and which division has the best residual income
figure, respectively?
A) North, North
B) South, South
C) North, South
D) South, North
34) Economic value added is equal to ________.
A) After-tax operating income – [Weighted-average cost of capital + (Total assets – Current liabilities)]
B) Pre-tax operating income – [Weighted-average cost of capital + (Total assets – Current liabilities)]
C) After-tax operating income – [Weighted-average cost of capital × (Total assets – Current liabilities)]
D) Pre-tax operating income – [Weighted-average cost of capital × (Total assets – Current liabilities)]
35) The after-tax average cost of all the long-term funds used by a corporation equals ________.
A) economic value added
B) cost of goodwill
C) interest cost of the capital
D) weighted-average cost of capital
36) Which of the following satisfies the DuPont method of profitability analysis?
A) Income / Investment = Income / Total costs + Revenues / Equity
B) Income / Investment = Income / Revenues + Revenues / Investment
C) Income / Investment = Income / Revenues × Revenues / Investment
D) Income / Investment = Income / Total costs × Revenues / Equity
37) Springfield Corporation, whose tax rate is 30%, has two sources of funds: long-term debt with a
market value of $6,000,000 and an interest rate of 8%, and equity capital with a market value of
$15,000,000 and a cost of equity of 12%. What is Springfield‘s weighted average cost of capital (WACC)?
A) 9.17%
B) 9.57%
C) 10.17%
D) 11.17%
38) Springfield Corporation, whose tax rate is 40%, has two sources of funds: long-term debt with a
market value of $8,000,000 and an interest rate of 8%, and equity capital with a market value of
$12,000,000 and a cost of equity of 12%. Springfield has two operating divisions, the Blue division and the
Gold division, with the following financial measures for the current year:
Total Assets
Current Liabilities
Operating Income
Blue Div.
$9,500,000
$2,800,000
$1,055,000
Gold Div.
$11,000,000
$2,200,000
$1,200,000
What is Economic Value Added ( ) for the Blue Division?
A) -$233,400
B) $21,960
C) $188,600
D) $433,960
39) Times Corporation, whose tax rate is 40%, has two sources of funds: long-term debt with a market
value of $6,000,000 and an interest rate of 9%, and equity capital with a market value of $18,000,000 and a
cost of equity of 11%. Times Corporation’s after-tax cost of debt is ________.
A) 3.40%
B) 5.40%
C) 5.00%
D) 7.40%
40) Stonex Corp, whose tax rate is 40%, has two sources of funds: long-term debt with a market value of
$6,000,000 and an interest rate of 8%, and equity capital with a market value of $14,000,000 and a cost of
equity of 12%. Stonex has two operating divisions, the Blue division and the Gold division, with the
following financial measures for the current year:
Total Assets
Current Liabilities
Operating Income
Blue Div.
$9,500,000
$2,500,000
$1,155,000
Gold Div.
$10,000,000
$2,400,000
$1,200,000
Calculate EVA for the Gold Division.
A) ($57,640)
B) ($27,840)
C) ($37,340)
D) $397,440
Answer the following questions using the information below:
Waldorf Company has two sources of funds: long-term debt with a market and book value of $5 million
issued at an interest rate of 12%, and equity capital that has a market value of $4 million (book value of $2
million). Waldorf Company has profit centers in the following locations with the following operating
incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 25%.
Operating Income
Assets
Current Liabilities
St. Louis
$ 480,000
$ 2,000,000
$ 100,000
Cedar Rapids
$600,000
$ 4,000,000
$ 300,000
Wichita
$1,020,000
$6,000,000
$600,000
41) What is the for St. Louis?
A) $127,870
B) $163,730
C) $196,270
D) $360,000
42) What is the for Cedar Rapids?
A) $67,790
B) $110,000
C) $117,000
D) $152,500
43) What is the for Wichita?
A) $225,000
B) $765,000
C) $207,180
D) $557,820
Answer the following questions using the information below:
Coldbrook Company has two sources of funds: long-term debt with a market and book value of $15 million
issued at an interest rate of 10%, and equity capital that has a market value of $9 million (book value of $5
million). Coldbrook Company has profit centers in the following locations with the following operating
incomes, total assets, and current liabilities. The cost of equity capital is 15%, while the tax rate is 30%.
Operating Income
Assets
Current Liabilities
Bish Bash Falls
$ 815,000
$ 3,750,000
$ 800,000
Brooksville
$1,100,000
$ 5,000,000
$ 1,200,000
Stonybrook
$2,450,000
$9,250,000
$3,180,000
44) What is the for Bish Bash Falls?
A) $338,563
B) $305,000
C) $275,500
D) $255,500
45) What is the for Brooksville?
A) $476,250
B) $428,000
C) $415,525
D) $390,000
46) What is the for Stonybrook?
A) $1,108,000
B) $1,168,700
C) $1,315,063
D) $1,403,063
47) A major weakness of comparing two companies using only operating incomes as the basis of
comparison is that it ignores the differences in the size of the investment.
48) Reducing the investment base involves decreasing idle cash, managing credit judiciously,
determining proper inventory levels, and spending carefully on long-term assets.
49) Return on sales measures how effectively costs are managed.