Deck 12: Performance Evaluation in Decentralized Organizations

Question 1

A characteristic of an effective performance measure is that it yields maximum information about the decisions or actions of the individual or organizational unit.

Answer 1

True

Question 2

Decentralizing authority empowers employees at the higher levels.

Answer 2

False

Question 3

Cost centers for which there is a clear relation between inputs and outputs are termed discretionary cost centers.

Answer 3

False

Question 4

Cost center managers serve two roles in organizations - achieving cost targets for a given level of output in the short term, and making continuous improvements to increase revenue in the long term.

Question 5

Organizations typically use budget variances to measure cost center performance in the long-run.

Question 6

The controllability principle is always the right approach for choosing performance measures.

Question 7

Suma is a philosophy of continuous improvement that encourages and rewards employees who constantly seek and suggest improvements to activities and business processes.

Question 8

Most controllable measures are informative; however an informative measure is not necessarily controllable.

Question 9

Organizations use monitoring, performance evaluation, and incentive schemes to manage the cost of delegating decisions.

Question 10

Firms often use profit before taxes to evaluate profits centers, computed as contribution margin less traceable fixed costs.

Question 11

The major criticism against ROI is that it is not an effective summary measure of business profitability.

Question 12

Decentralization worsens the problem of divergence between individual and organizational goals by preventing lower-level managers from preparing to move to upper-level positions.

Question 13

Managers of investment centers enjoy little autonomy in decentralized organizations.

Question 14

Net book value is the original acquisition cost of plant and equipment less accumulated depreciation.

Question 15

Cost center managers are charged with minimizing the cost of producing a specified level of output or the cost of delivering a specified level of service.

Question 16

Residual income represents the additional profit or value generated by an investment after meeting the required rate of return.

Question 17

Normally, we exclude interest and taxes from the calculation of an investment center's profit results from its operations because profit center managers usually do not influence financial or tax-related decisions.

Question 18

Production managers have little control over the volume of production.

Question 19

A characteristic of an effective performance measure is that it is easy to understand and communicate.

Question 20

Ensuring smooth succession is important for the survival of any company.

Question 21

A common approach to setting transfer prices is using cost-based transfer prices (including variable and full cost).

Question 22

When intra-company transfers occur, a legally recognized sale takes place even though the divisions are part of the same company.

Question 23

To make effective trade-offs among the attributes of performance measures, organizations often use:

A)A combination of performance measures.
B)Only financial performance measures.
C)Avoid using more than one measure.
D)Select a single performance measure that possesses of the characteristics of an effective performance measure.
E)None of the above.

Question 24

Which of the following is not a characteristic of effective performance measures?

A)Is easy to understand and communicate.
B)Is easy to measure.
C)Separates employee and organizational goals.
D)Yields maximum information about the decisions or actions of the individual or organizational unit.
E)All of the above are characteristics of effective performance measures.

Question 25

Which of the following is not an example of a profit center?

A)Production department of a manufacturing plant.
B)An individual product line at Proctor and Gamble.
C)A retail store.
D)All of the above are examples of profit centers.
E)None of the above is an example of a profit center.

Question 26

Which of the following is not a benefit of decentralization?

A)Trains future managers.
B)Simple to coordinate decisions.
C)Empowers employees and increases job satisfaction.
D)Permits timely decisions.
E)All of the above are benefits of decentralization.

Question 27

Which of the following is not an example of a cost center?

A)Plant maintenance.
B)Sears store.
C)Human resources.
D)Data processing.
E)General administration.

Question 28

Which of the following is not a role of a cost center manager in an organization?

A)To achieve cost targets for a given level of output in the short term.
B)Making continuous efficiency improvements to cut costs in the long term.
C)To achieve sales targets for a given level of output.
D)Neither A nor B are roles of a cost center manager.

Question 29

From the perspective of determining corporate pre-tax income, a transfer price does not serve any useful purpose.

Question 30

Which of the following is not a cost of decentralization?

A)Might lead to an emphasis on local versus global goals.
B)Requires costly coordination of decisions.
C)Leads to improper decisions due to divergence between individual and organizational goals.
D)Fails to train future managers.
E)All of the above are costs of decentralization.

Question 31

Which of the following is not a responsibility center?

A)Investment center.
B)Cost center.
C)Administrative center.
D)Profit center.
E)All of the above are responsibility centers.

Question 32

Which of the following is not a performance measure used to evaluate a profit center's manager?

A)Customer satisfaction.
B)How well the manager utilizes funds made available to his/her division.
C)Employee turnover.
D)Market share.
E)All of the above are performance measures used to evaluate a profit center's manager.

Question 33

Divisional managers have a keen interest in the transfer price because their individual compensation often depends on the profit reported by their division.

Question 34

Firms often view investment centers as:

A)Support activities.
B)Discretionary cost centers.
C)Stand-alone businesses.
D)Revenue centers.
E)None of the above.

Question 35

Which of the following is a type of decision a regional manager would make?

A)Pricing.
B)Promotion.
C)Office management.
D)A and B only.
E)A, B and C are decisions a regional manager would make.

Question 36

A cost center for which there is a clear relation between inputs and outputs is referred to as a:

A)Discretionary cost center.
B)Budget center.
C)Engineered cost center.
D)Kaizen center.
E)None of the above.

Question 37

Ideally, the best performance measures:

A)Reflect the decision rights assigned to the individual/organizational unit.
B)Yield the maximum information about the decisions or actions of the individual/organizational unit.
C)Have low measurement error.
D)Are easy to understand and communicate.
E)All of the above.

Question 38

Which of the following does not describe Kaizen?

A)Encourages and rewards employees who constantly seek and suggest improvements to activities and business processes.
B)Is a philosophy of continuous improvement.
C)Involves comparing the effectiveness and efficiency of various activities and business processes in a firm against the best practices in the industry.
D)None of the above statements describe Kaizen.
E)All of the above describe Kaizen.

Question 39

Setting effective transfer prices is relatively simply because division managers' strategic and economic considerations for the company as a whole are the same.

Question 40

A production manager should be held accountable for:

A)Production delays.
B)Production delays and overall volume of production.
C)Changing prices.
D)Changing prices and overall volume of production.
E)Losses due to natural disasters.

Question 41

Which of the following transfer prices always results in both divisions voluntarily making the right decisions from the perspective of the company as a whole?

A)Variable cost-based transfer prices.
B)Full cost-based transfer prices.
C)Market-based transfer prices.
D)Negotiated transfer prices.
E)None of the above.

Question 42

Which of the following describes ROI?

A)It fosters underinvestment.
B)It ignores future period considerations.
C)It is less suitable for evaluating long-term performance.
D)None of the above.
E)All of the above.

Question 43

Which of the following is not a popular measure of investment center performance?

A)Employee turnover.
B)Return on investment.
C)Residual income.
D)Economic value added.
E)None of the above.

Question 44

Which of the following transfer price approaches is most appropriate for a short-term problem in which the selling division has excess capacity?

A)Variable cost-based transfer prices.
B)Full cost-based transfer prices.
C)Market-based transfer prices.
D)Negotiated transfer prices.
E)None of the above.

Question 45

Which of the following transfer prices gives divisions considerable autonomy?

A)Variable cost-based transfer prices.
B)Full cost-based transfer prices.
C)Market-based transfer prices.
D)Negotiated transfer prices.
E)None of the above.

Question 46

Which of the following is not a common approach to transfer pricing?

A)Variable cost-based transfer prices.
B)Full cost -based transfer prices.
C)Market-based transfer prices.
D)Negotiated transfer prices.
E)All of the above are common approaches to transfer pricing.

Question 47

Gant Manufacturing Company has provided the following financial information: $$\begin{array} { l r } \text { Sales } & \$ 400,000 \\\text { Variable Expenses } & \$ 250,000 \\\text { Fixed Expenses } & \$ 50,000 \\\text { Investment in Fixed Assets } & \$ 300,000 \\\text { Required Rate of Ret urn } & 5 \%\end{array}$$ What is Gant's residual income?

A)$80,000.
B)$95,000.
C)$100,000.
D)$85,000.
E)None of the above.

Question 48

Which of the following is the formula for ROI?

A)Profit ÷ Investment.
B)(Profit ÷ Sales) x (Sales ÷ Investment).
C)Profit margin x Asset Turnover.
D)None of the above.
E)All of the above.

Question 49

Which of the following is not an option in deciding how to incorporate depreciable fixed assets in measuring divisional investment?

A)Net book value.
B)Gross book value.
C)Transfer price.
D)Replacement cost of the asset.
E)Current value of the asset.

Question 50

Which of the following transfer prices, in theory, is the most sound because it provides the best measure of the opportunity cost of inter-divisional transfers?

A)Variable cost-based transfer prices.
B)Full cost-based transfer prices.
C)Market-based transfer prices.
D)Negotiated transfer prices.
E)None of the above.