Question 1

Designers of executive compensation plans emphasise which of the following factors?

Accepted Answer

A) Administrative ease 
B) Achievement of organisational goals 
C) The probability that the executives affected by the plan will perceive the plan as fair 
D) All of these answers are correct. 
A) Administrative ease 
B) Achievement of organisational goals 
C) The probability that the executives affected by the plan will perceive the plan as fair 
D) All of these answers are correct.

Question 2

An important consideration in designing compensation arrangements is the trade-off between creating incentives and imposing risks.

Accepted Answer

A) True 
 B)False

Question 3

Answer the following questions using the information below:
The top management at Munchie Company,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:
 $$\begin{array} { l r r r } 
& \text { Alpha Division } & \text { Beta Division } & \text { Gamma Division } \
\text { Sales } & \$ 2500000 & ( \mathrm { a } ) & \$ 1150000 \
\text { Net operating profit } & \$ 1500000 & \$ 650000 & \$ 575000 \
\text { Operating assets } & ( \mathrm { b } ) & ( \mathrm { c } ) & \$ 766667 \
\text { Return on investment } & 0.25 & 0.15 & \text { (d) } \
\text { Return on sales } & ( \mathrm { e } ) & 0.10 & 0.5 \
\text { Investment turnover } & ( \mathrm { f } ) & ( \mathrm { g } ) & 1.5
\end{array}$$
-What is the Alpha Division's return on sales?

Accepted Answer

A) 0.25 
B) 0.42 
C) 0.60 
D) 0.75 
A) 0.25 
B) 0.42 
C) 0.60 
D) 0.75

Question 4

The question 'Does operating profit best measure a subunit's financial performance?' is considered to be part of which step in designing an accounting-based performance measure?

Accepted Answer

A) Choose performance measures that align with top management's financial goals. 
B) Choose the time horizon of each performance measure. 
C) Choose a definition for each performance measure. 
D) Choose a measurement alternative for each performance measure. 
A) Choose performance measures that align with top management's financial goals. 
B) Choose the time horizon of each performance measure. 
C) Choose a definition for each performance measure. 
D) Choose a measurement alternative for each performance measure.

Question 5

Answer the following questions using the information below:
The top management at Watersport Company, a manufacturer of water sport 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:
$\begin{array} { l r r r r } 
& \text { Jetski Division } & \text { Boat Division } & \text { Surfboard Division } \
\text { Sales } & \$ 7500000 & ( \mathrm { a } ) & \$ 1800000 \
\text { Net operating profit } & \$ 750000 & \$ 1080000 & \$ 450000 \
\text { Operating assets } & ( \mathrm { b } ) & ( \mathrm { c } ) & \$ 1500000 \
\text { Retum on investment } & 0.20 & 0.10 & ( \mathrm {~d} ) \
\text { Retum on sales } & ( \mathrm { e } ) & 0.12 & 0.25 \
\text { Investment turnover } & \text { (f) } & ( \mathrm { g } ) & 1.2
\end{array}$
-Museum Corporation uses the investment centre concept for the museums that it manages.Select operating data for three of its museums for 2017 are as follows:
 $$\begin{array} { | l | r | r | r | } 
\hline & { \text { Melbourne } } & { \text { Canberra } } &  { \text { Brisbane } } \
\hline \text { Revenue } & \$ 600000 & \$ 750000 & \$ 900000 \
\hline \text { Operating assets } & 300000 & 250000 & 350000 \
\hline \text { Net operating profit } & 51000 & 56000 & 59000 \
\hline
\end{array}$$ 
Required:
a.Compute the return on investment for each division.
b.Which museum manager is doing best based only on ROI? Why?
c.What other factors should be included when evaluating the managers?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

a.
b.Canberra was doing the best because

Question 6

Answer the following questions using the information below:
The top management at Munchie Company,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:
 $$\begin{array} { l r r r } 
& \text { Alpha Division } & \text { Beta Division } & \text { Gamma Division } \
\text { Sales } & \$ 2500000 & ( \mathrm { a } ) & \$ 1150000 \
\text { Net operating profit } & \$ 1500000 & \$ 650000 & \$ 575000 \
\text { Operating assets } & ( \mathrm { b } ) & ( \mathrm { c } ) & \$ 766667 \
\text { Return on investment } & 0.25 & 0.15 & \text { (d) } \
\text { Return on sales } & ( \mathrm { e } ) & 0.10 & 0.5 \
\text { Investment turnover } & ( \mathrm { f } ) & ( \mathrm { g } ) & 1.5
\end{array}$$
-What were the sales for the Beta Division?

Accepted Answer

A) $4 333 333 
B) $5 952 380 
C) $6 500 000 
D) $7 151 800 
A) $4 333 333 
B) $5 952 380 
C) $6 500 000 
D) $7 151 800

Question 7

One way to achieve greater comparability of historical cost-based ROIs for a company's foreign division is to restate performance in home country currency.

Accepted Answer

A) True 
 B)False

Question 8

Answer the following questions using the information below:
The top management at Munchie Company,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:
 $$\begin{array} { l r r r } 
& \text { Alpha Division } & \text { Beta Division } & \text { Gamma Division } \
\text { Sales } & \$ 2500000 & ( \mathrm { a } ) & \$ 1150000 \
\text { Net operating profit } & \$ 1500000 & \$ 650000 & \$ 575000 \
\text { Operating assets } & ( \mathrm { b } ) & ( \mathrm { c } ) & \$ 766667 \
\text { Return on investment } & 0.25 & 0.15 & \text { (d) } \
\text { Return on sales } & ( \mathrm { e } ) & 0.10 & 0.5 \
\text { Investment turnover } & ( \mathrm { f } ) & ( \mathrm { g } ) & 1.5
\end{array}$$
-What is Alpha Division's investment turnover?

Accepted Answer

A) 1.5 
B) 0.42 
C) 2.4 
D) 0.6 
A) 1.5 
B) 0.42 
C) 2.4 
D) 0.6

Question 9

A problem with rewarding managers only on the basis of residual income is that:

Accepted Answer

A) on occasion,the items in the residual income calculation are not quantifiable. 
B) residual income is difficult to measure. 
C) residual income can depend on items over which the manager has little control. 
D) All of these answers are correct. 
A) on occasion,the items in the residual income calculation are not quantifiable. 
B) residual income is difficult to measure. 
C) residual income can depend on items over which the manager has little control. 
D) All of these answers are correct.

Question 10

Answer the following questions using the information below:
The top management at Watersport Company, a manufacturer of water sport 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:
$\begin{array} { l r r r r } 
& \text { Jetski Division } & \text { Boat Division } & \text { Surfboard Division } \
\text { Sales } & \$ 7500000 & ( \mathrm { a } ) & \$ 1800000 \
\text { Net operating profit } & \$ 750000 & \$ 1080000 & \$ 450000 \
\text { Operating assets } & ( \mathrm { b } ) & ( \mathrm { c } ) & \$ 1500000 \
\text { Retum on investment } & 0.20 & 0.10 & ( \mathrm {~d} ) \
\text { Retum on sales } & ( \mathrm { e } ) & 0.12 & 0.25 \
\text { Investment turnover } & \text { (f) } & ( \mathrm { g } ) & 1.2
\end{array}$
-'Return on investment' is also called the 'accrual accounting rate of return'.

Accepted Answer

A) True 
 B)False

Question 11

Goal congruence is more likely to be promoted by using return on investment rather than residual income as a measure of a subunit's managerial performance.

Accepted Answer

A) True 
 B)False

Question 12

Answer the following questions using the information below:
Echidna Company has two sources of funds: long-term debt with a market and book value of $30 million issued at an interest rate of 10%,and equity capital that has a market value of $18 million (book value of $5 million).Echidna Company has profit centres in the following locations with the following operating profits,total assets,and current liabilities.The cost of equity capital is 15%,while the tax rate is 30%.
 $$\begin{array} { | l | r | r | r | } 
\hline & \text { Operating Profit } & { \text { Assets } } & \text { Current Liabilities } \
\hline \text { Mt Iron } & \$ 1630000 & \$ 5625000 & \$ 1600000 \
\hline \text { Mt Pilbara } & \$ 2200000 & \$ 7500000 & \$ 2400000 \
\hline \text { Broken Hill } & \$ 4900000 & \$ 13875000 & \$ 6360000 \
\hline
\end{array}$$
-What is the EVA for Mt Iron?

Accepted Answer

A) $710 000 
B) $511 000 
C) $738 500 
D) $677 126 
A) $710 000 
B) $511 000 
C) $738 500 
D) $677 126

Question 13

The first step in designing accounting based performance measures is to choose performance measures that align with top management's financial goals.

Accepted Answer

A) True 
 B)False

Question 14

Managers usually use the term 'return on investment' to evaluate:

Accepted Answer

A) the performance of a subunit. 
B) a potential project. 
C) the performance of a subdivision. 
D) Both A and C are correct. 
A) the performance of a subunit. 
B) a potential project. 
C) the performance of a subdivision. 
D) Both A and C are correct.

Question 15

The after-tax average cost of all the long-term funds used by a corporation equals:

Accepted Answer

A) economic value added. 
B) return on investment. 
C) weighted-average cost of capital. 
D) return on equity. 
A) economic value added. 
B) return on investment. 
C) weighted-average cost of capital. 
D) return on equity.

Question 16

Ghan Rail 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%.What is Ghan Rail's weighted-average cost of capital (WACC)?

Accepted Answer

A) .0480 
B) .1000 
C) .0912 
D) .0800 
A) .0480 
B) .1000 
C) .0912 
D) .0800

Question 17

Answer the following questions using the information below:
Echidna Company has two sources of funds: long-term debt with a market and book value of $30 million issued at an interest rate of 10%,and equity capital that has a market value of $18 million (book value of $5 million).Echidna Company has profit centres in the following locations with the following operating profits,total assets,and current liabilities.The cost of equity capital is 15%,while the tax rate is 30%.
 $$\begin{array} { | l | r | r | r | } 
\hline & \text { Operating Profit } & { \text { Assets } } & \text { Current Liabilities } \
\hline \text { Mt Iron } & \$ 1630000 & \$ 5625000 & \$ 1600000 \
\hline \text { Mt Pilbara } & \$ 2200000 & \$ 7500000 & \$ 2400000 \
\hline \text { Broken Hill } & \$ 4900000 & \$ 13875000 & \$ 6360000 \
\hline
\end{array}$$
-In an Economic Value Added (EVA)calculation,the measure of the invested capital for a division would be that division's assets minus that division's liabilities.

Accepted Answer

A) True 
 B)False

Question 18

The ________ method of profitability analysis recognises the two basic ingredients in profit-making: increasing profit per dollar of revenues and using assets to generate more revenues.

Accepted Answer

A) balanced scorecard 
B) DuPont 
C) residual-income 
D) economic value added 
A) balanced scorecard 
B) DuPont 
C) residual-income 
D) economic value added

Question 19

Kase Tractor Company allows its divisions to operate as autonomous units.The operating data for 2017 follow:
 $$\begin{array} { | l | r | r | r | } 
\hline &{ \text { Ploughs } } &  { \text { Tractors } } &  { \text { Combines } } \
\hline \text { Revenues } & \$ 2250000 & \$ 500000 & \$ 4800000 \
\hline \text { Accounts receivable } & 800000 & 152500 & 1435000 \
\hline \text { Operating assets } & 1000000 & 400000 & 1750000 \
\hline \text { Net operating profit } & 220000 & 60000 & 480000 \
\hline \text { Taxable income } & 165000 & 90000 & 385000 \
\hline
\end{array}$$ 
Required:
a.Calculate the investment turnover for each division.
b.Calculate the return on sales for each division.
c.Calculate the return on investment for each division.
d.Which division manager is doing best? Why?
e.What other factors should be included when evaluating the managers?
For parts (b)and (c)income is defined as operating profit.
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

a. Investment tumover:
d.Combines' manag

Question 20

Answer the following questions using the information below:
Echidna Company has two sources of funds: long-term debt with a market and book value of $30 million issued at an interest rate of 10%,and equity capital that has a market value of $18 million (book value of $5 million).Echidna Company has profit centres in the following locations with the following operating profits,total assets,and current liabilities.The cost of equity capital is 15%,while the tax rate is 30%.
 $$\begin{array} { | l | r | r | r | } 
\hline & \text { Operating Profit } & { \text { Assets } } & \text { Current Liabilities } \
\hline \text { Mt Iron } & \$ 1630000 & \$ 5625000 & \$ 1600000 \
\hline \text { Mt Pilbara } & \$ 2200000 & \$ 7500000 & \$ 2400000 \
\hline \text { Broken Hill } & \$ 4900000 & \$ 13875000 & \$ 6360000 \
\hline
\end{array}$$
-Economic value added,unlike residual income,charges managers for the costs of their investments in long-term assets and working capital.

Accepted Answer

A) True 
 B)False

Designers of executive compensation plans emphasise which of the following factors?

An important consideration in designing compensation arrangements is the trade-off between creating incentives and imposing risks.

The question 'Does operating profit best measure a subunit's financial performance?' is considered to be part of which step in designing an accounting-based performance measure?

One way to achieve greater comparability of historical cost-based ROIs for a company's foreign division is to restate performance in home country currency.

A problem with rewarding managers only on the basis of residual income is that:

Goal congruence is more likely to be promoted by using return on investment rather than residual income as a measure of a subunit's managerial performance.

The first step in designing accounting based performance measures is to choose performance measures that align with top management's financial goals.

Managers usually use the term 'return on investment' to evaluate:

The after-tax average cost of all the long-term funds used by a corporation equals:

Ghan Rail 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%.What is Ghan Rail's weighted-average cost of capital (WACC)?

The ________ method of profitability analysis recognises the two basic ingredients in profit-making: increasing profit per dollar of revenues and using assets to generate more revenues.

Management Accounting in Context

Different Costs for Different Purposes

Determining How Costs Behave

Costvolumeprofit Analysis

Estimating the Cost of Producing Services

Estimating the Costs of Products and Inventory

Target Costing, Managing Activities and Managing Capacity

Activity-Based Management and Activity-Based Costing

Pricing and Customer Profitability

Decision Making and Relevant Information

Budgeting, Management Control and Responsibility Accounting

Flexible Budgets, Direct Cost Variances and Management Control

Flexible Budgets, Overhead Cost Variances and Management Control

Allocation of Support-Department Costs, Common Costs and Revenues

Strategy Formation, Strategic Control and the Balanced Scorecard

Quality, Time and the Balanced Scorecard

Inventory Management, Just-In-Time and Simplified Costing Methods

Capital Budgeting and Cost Analysis

Management Control Systems, Transfer Pricing and Multinational Considerations

Measuring and Reporting Sustainability

Filters

Exam 20: Performance Measurement, Compensation and Multinational Considerations

Designers of executive compensation plans emphasise which of the following factors?

An important consideration in designing compensation arrangements is the trade-off between creating incentives and imposing risks.

The question 'Does operating profit best measure a subunit's financial performance?' is considered to be part of which step in designing an accounting-based performance measure?

One way to achieve greater comparability of historical cost-based ROIs for a company's foreign division is to restate performance in home country currency.

A problem with rewarding managers only on the basis of residual income is that:

Goal congruence is more likely to be promoted by using return on investment rather than residual income as a measure of a subunit's managerial performance.

The first step in designing accounting based performance measures is to choose performance measures that align with top management's financial goals.

Managers usually use the term 'return on investment' to evaluate:

The after-tax average cost of all the long-term funds used by a corporation equals:

Ghan Rail 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%.What is Ghan Rail's weighted-average cost of capital (WACC)?

The ________ method of profitability analysis recognises the two basic ingredients in profit-making: increasing profit per dollar of revenues and using assets to generate more revenues.

Management Accounting in Context

Different Costs for Different Purposes

Determining How Costs Behave

Costvolumeprofit Analysis

Estimating the Cost of Producing Services

Estimating the Costs of Products and Inventory

Target Costing, Managing Activities and Managing Capacity

Activity-Based Management and Activity-Based Costing

Pricing and Customer Profitability

Decision Making and Relevant Information

Budgeting, Management Control and Responsibility Accounting

Flexible Budgets, Direct Cost Variances and Management Control

Flexible Budgets, Overhead Cost Variances and Management Control

Allocation of Support-Department Costs, Common Costs and Revenues

Strategy Formation, Strategic Control and the Balanced Scorecard

Quality, Time and the Balanced Scorecard

Inventory Management, Just-In-Time and Simplified Costing Methods

Capital Budgeting and Cost Analysis

Management Control Systems, Transfer Pricing and Multinational Considerations

Measuring and Reporting Sustainability

Filters