Chapter 10: Performance Measurement

Question 1

In decentralized organizations, decision-making authority is _____

Answer 1

spread throughout the organization

Question 2

Any part of an organization whose manager has control over and is accountable for all three centers (cost, profit, or investments) is a(n) _____

Answer 2

responsibility

Question 3

Managers of cost centers are expected to _____

Answer 3

minimize costs, while providing an acceptable level of service

Question 4

The manager of a(n) _____ center has control over both costs and revenues, but not over the use of investment funds.

Answer 4

profit

Question 5

Which of the following evaluation measures are used for investment center managers only—not for cost or profit center managers?

Answer 5

• Return on investment (ROI)
• Residual income

Question 6

In strongly decentralized organizations, even the lowest-level managers can make decisions.

Answer 6

true

Question 7

Net operating income ÷ Average operating assets = ____

Answer 7

Return on investment

Question 8

Which of the following is not one of the three primary types of responsibility centers?

Answer 8

sales

Question 9

The manager of a(n) profit _____ center does not have control over revenue or the use of investment funds.

Answer 9

cost

Question 10

Comparing actual net income to budgeted net income is often done to evaluate the manager of a(n) _____ center.

Answer 10

profit

Question 11

The manager of a(n)
profit _____ center has control over costs, revenue, and investments in operating assets.

Answer 11

investment

Question 12

Return on investment = _____

Answer 12

Net operating income ÷ Average operating assets

Question 13

Net operating income is income before _____ and _____

Answer 13

interest; taxes

Question 14

The ROI formula typically uses _____

Answer 14

average operating assets for the year

Question 15

Adams, Inc. has found that their managers are reluctant to replace old equipment with new, updated equipment. To stop this practice, Adams should compute ROI using assets’ net book values.

Answer 15

false

Question 16

ROI can be calculated as _____

Answer 16

• margin × turnover
• net operating income ÷ average operating assets

Question 17

In order to fully understand how a manager’s decisions can affect ROI, both _____ and _____ should be computed.

Answer 17

margin; turnover

Question 18

EBIT is another term for _____

Answer 18

net operating income

Question 19

Operating assets include _____

Answer 19

• equipment
• inventory
• accounts receivable

Question 20

Using net book value (instead of gross cost) to calculate average operating assets _____

Answer 20

increases ROI over time

Question 21

Last year, Valley Manufacturing reported sales of $800,000, net operating income of $40,000, and average operating assets of $400,000. The company’s return on investment (ROI) for last year was _____

Answer 21

10%

Question 22

Which of the following ratios are part of the ROI formula?

Answer 22

• Net operating income ÷ Sales
• Sales ÷ Average operating assets

Question 23

Computing ROI using the expanded model provides additional insights. ROI can be lowered by excessive operating expenses which can depress _____ and excessive operating assets which can depress _____.

Answer 23

margin; turnover

Question 24

Macey, Inc.’s investment center had average operating assets of $350,000, revenues of $1,050,000 and net operating income of $70,000. Return on investment is _____

Answer 24

20%

Question 25

Net operating income - (Average operating assets × Minimum required rate of return) = _____

Answer 25

residual income

Question 26

Components of throughput time include ______ time.

Answer 26

- queue - inspection - process

Question 27

The amount of time a product spends waiting to be worked on, to be moved, to be inspected, or to be shipped is referred to as _____ time.

Answer 27

queue

Question 28

Given a margin of 12%, sales of $150,000 and average operating assets of $90,000, the ROI is _____%.

Answer 28

20

Question 29

The net operating income that an investment center earns above the minimum required return on its average operating assets is _____.

Answer 29

residual income

Question 30

The elapsed time from when a customer order is received until the finished goods are shipped is known as the _____ _____ _____.

Answer 30

delivery cycle time

Question 31

JPL, Inc. recorded the following information for one of its products. All amounts are in days: Wait time 4.0; Inspection time 0.6; Process time 2.3; Move time 0.7; Queue time 3.1. JPL's throughput (manufacturing cycle) time is ______ days.

Answer 31

6.7

Question 32

The only value-added component of throughput time is _____ time.

Answer 32

process

Question 33

The net operating income that an investment center earns above the minimum required return on its operating assets is its _____ income.

Answer 33

residual

Question 34

Gavin, Inc. recorded the following information for one of its products. All amounts are in days: Wait time 5.0; Inspection time 0.7; Process time 2.5; Move time 0.4; Queue time 3.0. Gavin's delivery cycle time is ______ days.

Answer 34

11.6

Question 35

Time spent ensuring that the product is not defective is referred to as _____ time.

Answer 35

inspection

Question 36

Reducing wait time often enables companies to increase customer satisfaction and profits.

Answer 36

true

Question 37

The elapsed time from when a customer order is received until production of the order is started is called _____ time.

Answer 37

wait