Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
7) What is the current-cost depreciation in year 4 dollars?
A) $165,000
B) $200,000
C) $240,000
D) $295,000
E) $440,000
Use the information below to answer the following question(s).
Ruth Cleaning Products manufactures home cleaning products. The company has two divisions, Bleach
and Bleach-2. Because of different accounting methods and inflation rates, the company is considering
multiple evaluation measures. The following information is provided for the year just ended:
Assets
Book value
Assets
Current value
Income
Book value
Income
Current value
Bleach
$225,000
$300,000
$150,000
$155,000
Bleach-2
450,000
250,000
100,000
105,000
The company is currently using a required rate of return of 15 percent.
8) What are Bleach’s and Bleach-2’s return on investment based on current values?
A) 0.22; 0.67
B) 0.42; 0.52
C) 0.52; 0.42
D) 0.67; 0.22
E) 0.50; 0.45
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
9) What are Bleach’s and Bleach-2’s residual incomes, based on current values, respectively?
A) $116,250; $37,500
B) $110,000; $67,500
C) $67,500; $110,000
D) $37,500; $116,250
E) $115,340; $80,000
Objective: LO 24-2
Answer the following question(s) using the information below:
Carriage Ltd. manufactures baby carriages. The company has two divisions, Wheels and Assembly.
Because of different accounting methods and inflation rates, the company is considering multiple
evaluation measures. The following information is provided for the year just ended:
ASSETS
INCOME
Book value
Current value
Book value
Current value
Wheels
$485,000
$550,000
$120,000
$160,000
Assembly
$750,000
$1,200,000
$160,000
$172,500
The company is currently using a 12% required rate of return.
10) What are Wheels’s and Assembly’s return on investment based on book values, respectively?
A) 0.21; 0.25
B) 0.25; 0.21
C) 0.14; 0.29
D) 0.29; 0.14
E) 0.33; 0.23
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
11) What are Wheels’s and Assembly’s return on investment based on current values, respectively?
A) 0.21; 0.25
B) 0.25; 0.21
C) 0.14; 0.29
D) 0.29; 0.14
E) 0.33; 0.23
12) What are Wheels’s and Assembly’s residual incomes based on book values, respectively?
A) $74,000; $28,500
B) $61,800; $70,000
C) $63,500; $59.500
D) $28,500; $74,000
E) $101,800; $70,000
13) What are Wheels’s and Assembly’s residual incomes based on current values, respectively?
A) $70,000; $28,500
B) $94,000; $28,500
C) $94,000; $70,000
D) $28,500; $94,000
E) $61,800; $70,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
14) The cost today of purchasing an asset identical to the one currently held is called a(n)
A) actual cost.
B) current cost.
C) dual cost.
D) fixed cost.
E) sunk cost.
Use the information below to answer the following question(s).
The following data are available for a foundry operation started as a new company four years ago when
the construction cost index was 125:
Current liabilities
$170,000
Operating income
$176,200
NBV long-term assets (end year 3)
$687,500
Current assets
$300,000
Gross book value *
$1,100,000
Estimated total useful life *
8 years
Age of assets *
4 years
Construction cost index end of year 4
150
* = long-term assets at historical cost
15) What is the year 4 operating income using year-4 current cost amortization?
A) $(126,300)
B) $176,200
C) $73,700
D) $18,700
E) $148,700
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
16) What is the ROI using current-cost amortization?
A) (11.50)%
B) 16.00%
C) 22.5%
D) 12.00%
E) 11.25%
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
17) National Can Company has three divisions, Eastern, Midwestern, and Western. Because of very
different accounting methods and inflation rates in different countries it is considering multiple
evaluation measures. Information gathered about the divisions for the year just ended follows:
Assets Income
Book value Current value Book value Current value
Eastern $600,000 $900,000 $120,000 $110,000
Midwestern 700,000 700,000 120,000 120,000
Western 1,000,000 1,400,000 200,000 180,000
The company is currently using a required rate of return of 15 percent.
Required:
a. Compute the ROI using both book value and current value for all divisions. Round to three decimal
places.
b. Compute residual income using book value and current value for all divisions.
c. Does book value or current value provide the better basis for performance evaluation? Why? Which
division is the most successful?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
18) Holmes Electronics Ltd. has three divisions: Resistors, Semiconductors and Transistors, each located
in a different geographic region. Data for its most recent year are presented below:
Assets Income
Book value Current value Book value Current value
Resistors $750,000 $980,000 $180,000 $130,000
Semiconductors 900,000 925,000 170,000 190,000
Transistors 1,600,000 1,800,000 260,000 210,000
The company is currently using a required rate of return of 16 percent.
Required:
a. Compute the ROI using both book value and current value for all divisions. Round to four decimal
places.
b. Compute residual income using book value and current value for all divisions.
c. Does book value or current value provide the better basis for performance evaluation? Why? Which
division is the most successful?
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
19) Current cost is defined as the cost of purchasing an asset today identical to the one currently held.
Required:
Discuss why this is a useful concept and explain some difficulties in its use.
24.3 Analyze the technical difficulties that arise when comparing the performance of
divisions operating in different countries.
1) Comparing the performance of divisions of a multinational company operating in different countries is
difficult because of the differences in economic, legal, political, social and cultural environments.
2) Benchmarks represent ‘best practices’, and can be derived from either inside or outside the
organization.
3) Divisions operating in different countries often record performance is different currencies.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
4) If the exchange rate at the end of the a foreign subsidiary’s first year was 5 Fidgets to 1 Canadian
dollar, and if it was 8 Fidgets to 1 Canadian dollar at the end of the second (current) year, what exchange
rate should be used to convert total assets if we want to calculate the company‘s ROI in Canadian dollars?
A) the rate in effect when the ROI is calculated
B) the rate estimated to be in effect when the ROI is to be reported in the financial statements
C) the average rate for the year, assuming that the rate changed approximately evenly throughout the
year
D) the rate in effect when the assets were acquired (ie. 5 to 1)
E) it would be double-counting to convert the assets – leave both assets and income in fidgets and the
exchange rate for the numerator cancels out the exchange rate for the denominator
5) If a company is a multinational company with operations in several different countries, one way to
achieve comparability of historical-cost based ROIs for facilities in different countries is to
A) restate the results of operations using the cash basis method of accounting.
B) use GAAP for all reporting and calculations.
C) restate the results of all operations in dollars.
D) identify the rate of inflation in the most inflationary division and restate the other divisions’ results
using that rate.
E) do nothing, the ROIs are comparable without adjustments.
6) Which of the following statements is true?
A) The economic, legal, political, social, and cultural environments are always similar across countries.
B) Governments in some countries may impose controls and limit selling prices of a company’s products.
C) The availability of materials and skilled labour does not normally differ across countries.
D) There are no difficulties in comparing performance of divisions across different countries.
E) Nonfinancial performance measures should not be used when comparing performance of divisions in
different countries.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
7) ________ and ________ would be uncontrollable factors that a firm would need to consider when
evaluating the return on investment of an international division.
A) Manager’s experience; currency stability
B) Manager’s compensation; political climate
C) Required rate of return; legal requirements
D) Custom duties; cultural environment
E) Cultural requirements; required rate of return
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
8) The Irnakk Corporation manufactures iPod covers in Canada and China. The operations are organized
as decentralized divisions. The following information is available for the year just ended:
Canada Division China Division
Operating income $2,400,000 11,400,000 yuan
Total assets $16,000,000 75,000,000 yuan
The exchange rate at the time of Irnakk’s investment (the end of the previous year) in China was 7.5
Chinese yuan = $1 Canadian. During the year, the yuan declined steadily in value and the exchange rate
at the end of the current year was 8.5 yuan = $1 Canadian. The average exchange rate during the year was
8 yuan = $1 Canadian.
Required:
a. Calculate the Canadian Division’s ROI for last year based on dollars.
b. Calculate the Chinese Division’s ROI for last year based on yuan.
c. Which of Irnakk‘s two divisions earned the better ROI? Explain your answer, complete with
supporting calculations.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 24 – Multinational Performance Measurement and Compensation
9) A multinational established a division in a South American country as a subsidiary corporation, with
an initial investment in total assets of 13 million CU’s (the local currency is CU‘s), which cost the company
$3,250,000 Canadian at the time. The company sent an experienced manager to run the division, and gave
her a target of 13% required rate of return, promising a bonus if this was met and/or exceeded.
After one year, the subsidiary manager was pleased to report a 20% ROI.
You have been able to determine the following data pertaining to the subsidiary:
• Exchange rate at end of year was 8 CU‘s to 1 Cdn dollar
• Operating income was earned evenly throughout the year
• The exchange rate changed approximately evenly throughout the year
Required:
a. Calculate the subsidiary’s income in CU‘s.
b. Calculate the subsidiary’s ROI in Canadian dollars.
c. Calculate the subsidiary’s RI in Canadian dollars.
24.4 Evaluate the behavioural effects of salaries and incentives in compensation
arrangements.
1) An important consideration in designing compensation arrangements is the tradeoff between creating
incentives, and reducing risk.
2) Moral Hazard describes contexts in which, once risk is shared, the individual fails to make as much
effort to avoid harm as when risk was not shared.