Exam 14: Business Unit Performance Measurement

James Webb is the general manager of the Industrial Product Division,and his performance is measured using the residual income method.Webb is reviewing the following forecasted information for his division for next year: (CMA adapted) If the cost of capital is 15% and Webb wants to achieve a residual income target of $2,000,000,what will costs have to be in order to achieve the target?

Economic value added (EVA)adjustments are made to both the after-tax income and the capital employed.Both income and capital are adjusted to eliminate accounting distortions.

Which of the following statements is (are)true? (A)Divisional income statements do not include allocated common costs.(B)The gross margin ratio is computed by dividing operating income by sales.

Managerial performance can be measured in many different ways including return on investment (ROI)and residual income.A good reason for using residual income instead of ROI is that:

Managerial myopia is the distortion in incentives that result from using accounting measures to evaluate performance.This is one definition of managerial myopia.

How will increases in the following items affect return on investment (ROI)?

REB Service Co.is a computer service center.For the month of May,REB had the following operating statistics: (CMA adapted) Based on the above information,which one of the following statements is correct? REB has a:

Residual income is a performance evaluation that is used in conjunction with,or instead of,return on investment (ROI).In many cases,residual income is preferred to ROI because: (CIA adapted)

One disadvantage of using after-tax income as a performance measure of divisional results is it's an absolute measure which makes it difficult to compare divisions of significantly different sizes.Larger divisions will naturally show larger income than a smaller division would.

Treating research and development costs as an expense rather than a long-term asset may reduce a manager's inclination to participate in research and development activities.There would be a large impact on income in a single year rather than spreading it over many years.

Which of the following should not be used for the cost of capital to compute residual income?

The FGH Company has an asset turnover of 3.0 times,using assets of $45,000.The company also has a return on investment (ROI)of 20%.If the residual income was $2,250,what was the company's cost of capital?

Which one of the following items would most likely not be incorporated into the calculation of a division's investment base when using the residual income approach for performance measurement and evaluation? (CMA adapted)

One problem with economic value added (EVA)adjustments is determining the appropriate life for expenditures that benefit multiple periods.There is uncertainty in how many years an expenditure will yield benefits.

Which of the following items would not require an adjustment to capital employed when using economic value added (EVA)?

In determining the dollar amount to use for operating assets in the return on investment (ROI)calculation,companies will generally use either net book value or gross cost of the assets.Which of the following is an argument for the use of net book value rather than gross cost?

Which one of the following items would most likely not be incorporated into the calculation of a division's investment base when using the residual income approach for performance measurement and evaluation?

Using ending balances for the investment base in computing return on investment (ROI)might encourage managers to acquire assets:

The following information is available for Company X: What is Company X's residual income?

In computing the margin in a ROI analysis,which of the following is used?