Exam 16: Performance Evaluation and Compensation

Technical details about complex manufacturing processes are examples of specific knowledge.

THN Corporation reported operating income of $30,000, revenue of $50,000, and average operating assets of $40,000 for a recent year. Which of the following is true?

Basing executive compensation on accounting earnings: I. Is a popular practice in Canada II. Is sharply criticized because of potential negative long-term effects III. Leads to unbiased accounting practices

Which of the following responsibility centres can be evaluated using residual income?

Why might some organizations use both ROI and EVA in their performance measures for bonus-based compensation?

Two divisions of Interspatial Company report summary results as follows: Pluto Mars Sales $800,000 $900,000 Operating income $100,000 $150,000 Average investment $200,000 $400,000 a)Calculate the return on investment for each division and then break it down into the return on sales and investment turnover. b)What is the residual income for each division if the required rate of return is 20%?

Responsibility accounting is the process of using financial information to justify pay increases and promotions for managers.

Return on investment cannot be used effectively to evaluate profit centres because it motivates managers to make suboptimal decisions from the viewpoint of the organizations' owners.

Indicate whether each item listed below is most closely associated with: (A)return on investment, (B)residual income, or (C)economic value added. Each numbered item has only one correct answer. ____ 1. Adjustments incorporated in calculations are a matter of management judgment ____ 2. Components motivate managers to increase sales ____ 3. Discourages managers from investing in projects that may harm divisional results but may enhance overall organizational results ____ 4. Does not incorporate measurements of risk ____ 5. Does not penalize project investments with lower returns than current returns ____ 6. Easily compared with external benchmarks ____ 7. Incorporates weighted average cost of capital ____ 8. Larger subunits are more likely to report better results ____ 9. Measures the dollar amount of profits given a required rate of return ____ 10. Research and development costs are often capitalized in its calculation

Bellingham Division has a required rate of return by corporate headquarters of 20%. The weighted average cost of capital is 12%. You are given the following information for Bellingham's operations for a two-year period: 2005 2004 Current assets $ 50,000 $ 60,000 Long-term assets 200,000 204,000 Accumulated amortization 60,000 44,000 Current liabilities 40,000 20,000 Long-term debt 100,000 140,000 Operating income for the year 19,000 21,000 Tax rate 40% 40% The after-tax income for 2005 was:

An advantage of centralized decision making is:

Managers are held responsible for revenues in: I. Revenue centres II. Profit centres III. Investment centres

Economic value added uses "adjusted after-tax operating income" as one of its inputs. One purpose of using after-tax income, rather than operating income, is to:

In responsibility accounting, information is used to: I. Measure performance II. Produce financial statements for external users III. Motivate managers to perform well

(CMA)Responsibility accounting defines an operating centre that is responsible for revenue and costs as a(n):

Executive compensation is typically set by the shareholders at the annual meeting.

Horse Stables Inc. has operations in Edmonton and Calgary, Alberta. Each geographic location has the following responsibility centres: horse boarding, riding lessons, horse sales, and administrative support. The director at each location is responsible for decisions regarding investments in facilities, horses, and any other type of investments. In addition, the directors make operating decisions such as advertising, hiring, and evaluating personnel. Department heads for the responsibility centres are responsible for daily operating decisions. Identify the type of responsibility centre for each of the following: the two geographic locations and each of the responsibility centres-horse boarding, riding lessons, horse sales, and administrative support. Explain your classifications.

Return on investment can be decomposed into two ratios: investment turnover and return on sales.

Teresa's Taco Co. had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The return on investment was: