CHAPTER 15—ESSENTIALS OF CONTROL
MULTIPLE CHOICE
1. The purpose of a preventive (or pre-control) is to prevent
a.
existing problems from escalating.
b.
problems caused by a deviation from performance.
c.
feedback controls from creating damage.
d.
quality standards from being too demanding.
2. An example of a feedback control is a(n)
a.
financial report.
b.
quality specification.
c.
in-process inspection of parts.
d.
a field visit by top-level management.
3. A control system begins with
a.
measuring performance.
b.
agreeing on accuracy of measurement needed.
c.
agreeing on who will use the measurements.
d.
setting appropriate performance standards.
4. In its technical meaning, a budget is a plan for
a.
allocating resources.
b.
spending money.
c.
saving money.
d.
developing financial strategy.
5. Office manager Gus has spent all his annual money for paper towels, so he requests that until the end
of the budget cycle, employees bring their own paper towels to the office. What type of budget does
Gus most likely have?
a.
pro-forma
b.
master
c.
flexible
d.
fixed
6. Dunkin’ Donuts franchise manager Julie estimates how much her three stores will take in next year, as
well as how much she will spend. Julie is most likely preparing which type of budget?
a.
revenue and expense
b.
capital expenditure
c.
cash
d.
production
7. Which of the following is a recommended technique for preparing a sensible budget?
a.
Budget liberally for income, and conservatively for expenses.
b.
Budget conservatively for income and liberally for expenses.
c.
Do not allow for wiggle room.
d.
Go light in terms of basing budgets on historical information.
8. In calculating the profit margin, net income is
a.
subtracted from cost of goods sold.
b.
added to profits.
c.
divided by sales.
d.
subtracted from sales.
9. The financial ratio, revenue per employee is often used as a(n)
a.
measure of productivity.
b.
measure of return on capital.
c.
index of growth potential.
d.
index of bankruptcy potential.
10. The EVA (economic value added) is a guide to estimating how much a company earns in comparison
to
a.
competitive firms.
b.
a stock index such as the Dow Jones industrial average.
c.
the cost of capital.
d.
the average return on government bonds.
11. The financial measure of net debt evaluates how much a company owes after taking into account
a.
the effects of inflation on debt.
b.
money on hand that could be used to eliminate debt.
c.
the amount of debt that could be refinanced.
d.
how much debt could be eliminated by declaring bankruptcy.
12. A major purpose of a pro-forma earnings statement is to exclude
a.
salaries paid to non-productive employees.
b.
kickbacks paid to the company by large customers
c.
one-time charges not related to future earnings.
d.
operating costs.
13. The basic purpose of measuring cash flow is to estimate how much
a.
net cash a company has during a given period.
b.
money customers owe a company.
c.
time is left before a company goes bankrupt.
d.
return stockholders can expect during a given period.
14. Cash from (or used in) operating activities is the
a.
heart of cash flow.
b.
cash paid to outsiders such as banks or stockholders.
c.
cash received from selling stock or assets.
d.
cash at the beginning and end of the period covered.
15. The executive team at Midas Muffler and Brake decides to publish a statement of its available cash
that subtracts from the cash, the planned investments in new shops and new technology. The statement
can best be labeled a measure of
a.
pro-forma earnings
b.
free cash flow.
c.
EBITDA (earnings before interest, taxes, depreciation, and amortization.
d.
EVA (economic value added)
16. Which one of the following is not one of the perspectives of the balanced scorecard?
a.
financial
b.
customer service
c.
learning and growth
d.
cost controls
17. Under a balanced scorecard system, compensation is based on
a.
achieving all the factors in the balanced scorecard.
b.
financial goals and customer service goals.
c.
financial goals and internal process goals.
d.
learning and growth goals and internal process goals.
18. An important use of activity-based costing is to estimate the
a.
fixed and variable costs necessary to deliver a product or service.
b.
amount of resources consumed in producing a product or service.
c.
balanced scorecard for a firm.
d.
cycle time for delivering a product or service.
19. Positive approaches to cost cutting include
a.
videoconferencing to cut travel costs
b.
investing in new printers to cut inkjet cartridges costs.
c.
keeping sales expenses at or below 10 percent of sales.
d.
all of the choices
20. An example of intellectual capital is the
a.
money invested in a mainframe computer.
b.
brainpower of a company’s product development team.
c.
money invested in advertising in trade journals.
d.
accounts receivables for services.
21. A caution about cost cutting is that it can lead to
a.
low morale and lower quality goods and services.
b.
the image of a cheap company
c.
both a & b
d.
increase the cost of supplies
22. The control information provided by an information system is
a.
usually outdated when it arrives.
b.
based on activities that take place outside the company.
c.
virtually unlimited.
d.
quite restricted in scope.
23. Computer-aided monitoring is used for
a.
data-loss prevention.
b.
recording an employee’s efficiency.
c.
monitoring quality
d.
all of the choices
24. Computer-aided monitoring of work raises concerns about
a.
privacy issues.
b.
supply issues
c.
return-on-investment.
d.
profit loss.
25. A cost-effective control system
a.
provides a satisfactory return on investment.
b.
provides financial penalties for departments that exceed budget.
c.
eliminates the need for hiring outside consultants.
d.
approaches being totally automated.
TRUE/FALSE
1. A key advantage of external controls is that they help build commitment to the firm.
2. Internal control strategy is based on the belief that employees can be motivated by building their
commitment to organizational goals.
3. Deviation in a control system indicates the size of the discrepancy between performance standards and
actual results.
4. For a plan to qualify as a budget, it must specify results in terms of money.
5. Jim and Peggy own an income-tax service and are planning to purchase a $35,000 computer system
including software. The proposed expenditure should be allocated to their capital-expenditure budget.
6. A suggestion for preparing a budget is to allow yourself some “wiggle room” to avoid looking bad and
not making your projections.
7. A strong recommendation about preparing a budget is to skip intuition and stick to the facts when
forecasting future sales.
8. The profit margin financial ratio usually produces a more optimistic picture of financial performance
than does the gross profit margin.
9. A typical revenue per employee for a large business corporation would be about $1 million.
10. The EVA (economic value added) is a rough index of how much managers are paid in comparison to
their contribution to the firm.
11. Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a financial measure that
presents an optimistic picture of a company’s financial health.
12. José owns a custom motorcycle business. He borrowed $150,000 to set up shop and still owes
$100,000. José claims that a true measure of his indebtedness is only $50,000 because he has $50,000
cash on hand that he could use to pay debt in an emergency, thereby making use of the financial
measure called net debt.
13. The heart of cash flow is the cash provided by (or used in) financing activities.
14. Cash flow analysis is well accepted because it provides a more accurate picture of financial health than
sales volume.
15. The financial measure, free cash flow takes into account the idea that managers need to make capital
investments to maintain or expand the company’s fixed assets.
16. A recommended approach to cost cutting is to squeeze hard the expenditures of everybody but the top
management team.
17. An important part of the balanced scorecard is to provide workers with a complete picture of the
organization.
18. Activity-based costing takes into account the amount of resources consumed when estimating the cost
of a product.
19. Activity-based costing for a military measure such as cost per tank mile would take into account such
costs as research and development times, salaries, deterioration of equipment, and support workers
back at the base.
20. Intellectual capital is a measure of the money invested in equipment that is used for working with
ideas such as computers and WiFi.
21. Measuring performance in terms of anticipated market share is a valuable performance metric.
22. Information systems are widely used for computer-aided monitoring of work.
23. Electronic monitoring often contributes to low levels of job satisfaction, absenteeism, high turnover,
and job stress.
24. Electronic monitoring often contributes to low levels of job satisfaction, absenteeism, high turnover,
and job stress.
25. Used sensibly, controls enhance organizational and individual effectiveness.
ESSAY
1. Four years ago, executives of Burgerville, a regional restaurant chain, agreed to pay at least 90 percent
of health-care premiums for hourly employees who work at least 20 hours a week. Today, the
executives say the unusual move has saved money by cutting turnover, boosting sales, and improving
productivity.Burgerville say that work ethic translates into higher revenue.
1. What does this story illustrate about a manager’s use of financial measures such as turnover?
2. What does this story illustrate about cost control?
2. Describe the measurement of intellectual capital.
3. Describe the use of cash flow to measure the financial health of a firm.
4. Describe the characteristics of an effective control system.
