Ch. 18 - Performance Measurement & Value Management

Question 1

performance measurement

Answer 1

A process that identifies and gathers information about the work performed and the results achieved by an individual, activity, process, or organizational unit as compared to preestablished criteria.

Question 2

management control

Answer 2

The system used by upper-level managers to evaluate the performance of mid-level managers.

Question 3

operational control

Answer 3

The monitoring of short-term operating performance; takes place when mid-level managers monitor the activities of operating-level managers and employees.

Question 4

management controls focuses on _________ managers and _________, __________ issues

Answer 4

higher level managers and long-term, strategic issues

Question 5

The areas of responsibility in management control is often called:

Answer 5

strategic business units

Question 6

strategic business unit (SBU)

Answer 6

A well-defined set of controllable operating activities over which an SBU manager is responsible.

Question 7

What are four types of strategic business unit examples?

Answer 7

-cost centers
-profit centers
-revenue centers
-investment centers

Question 8

What are the objectives of management controls?

Answer 8

1. Motivate managers to exert a high level of effort to achieve the goals set by top management
2. Provide the right incentives for managers to make decisions consistent with the goals set by top management–that is, to align managers’ efforts with desired strategic goals. The alignment of managers’ goals with those of top management is also referred to as goal congruence.
3. Determine the fair rewards to be earned by managers for their effort and skill and the effectiveness of their decision making.

Question 9

employment contract

Answer 9

An agreement between the manager and top management, designed to provide incentives for the manager to act autonomously to achieve top management’s objectives.

Question 10

principal–agent model

Answer 10

A conceptual model that contains the key elements that contracts must have to achieve the desired objectives.

Question 11

What are examples of cost SBUs?

Answer 11

They include manufacturing plants or direct manufacturing departments such as assembly or finishing and manufacturing support departments (aka service departments) such as a materials handling, maintenance, or engineering.

Direct manufacturing and manufacturing support (service) departments are often evaluated as costs centers because these manager have significant direct control over the costs but little control over revenues or decision making for investment in facilities.

Question 12

What are the three main issues that arise when implementing cost centers?

Answer 12

1. cost shifting (when a department replaces its controllable costs with noncontrollable costs)
2. excessive focus on short-term objectives
3. the miscommunication between managers and top manages arising from budgetary slack (budgetary slack is the difference between budgeted and expected performance).

Question 13

discretionary-cost method

Answer 13

Used when costs are considered largely uncontrollable; an input-oriented approach that applies discretion at the planning stage.

Question 14

engineered-cost method

Answer 14

An output-oriented method that considers costs to be variable and, therefore, controllable.

Question 15

dual allocation

Answer 15

A cost allocation method that separates fixed and variable costs and traces variable service department costs to the user departments; fixed costs are allocated based on either equal shares among departments or a predetermined budgeted proportion.

Question 16

Profit centers are defined where….

Answer 16

SBU managers have authority to make decisions that affect both revenues and costs. The profit center managers goals is to earn profits.

Question 17

contribution income statement

Answer 17

In a contribution income statement, variable costs are subtracted from sales to get total contribution margin, from which fixed costs are subtracted, to yield the amount of operating profit for the period.

Question 18

contribution by profit center (CPC)

Answer 18

Measures profit after all traceable costs and is therefore a performance measure that is controllable by the profit center manager.

Question 19

controllable fixed costs

Answer 19

Fixed costs that the profit center manager can influence in approximately a year or less.

Question 20

noncontrollable fixed costs

Answer 20

Costs that are not controllable within a year’s time, usually including facilities-related costs such as depreciation, taxes, and insurance.

Question 21

controllable margin

Answer 21

A margin determined by subtracting short-term controllable fixed costs from the contribution margin.

Question 22

value-chain analysis

Answer 22

A strategic analysis tool used to identify where value to customers can be increased or costs reduced, and to better understand the firm’s linkages with suppliers, customers, and other firms in the industry.