P1SC Performance Management Flashcards
The best basis upon which cost standards should be set to measure controllable production inefficiencies is
A. Ideal standards
B. Normal capacity
C. Attainable standards
D. Average historical peformance
C. Attainable Standards
Reasonably attainable standards are based on what the average trained employee should be expected to produce. Standards based on attainable performance should be used as it takes into consideration a normal amount of time lost, normal amounts of waste, and a normal learning curve. Comparison of Actual results to Attainable Standards will result in variances or production inefficiencies which are controllable. Once these controllable production inefficiencies are identified they can be rectified.
Ideal Standards assume that everything in the production cycle happens exactly as planned and are extremely difficult to achieve. It assumes no breakdowns, no waste, and every process at maximum efficiency. If standards are sest using ideal standards it would be very difficult to attain and hence ideal standards are not the best basis to measure controllable production inefficiencies as variances between ideal standards and actual performances might not all be controllable.
Normal Capacity is average level of production and Historical Performance is based on past actual results, both of these would not help us understand production inefficiencies.
Net Operating Profit after Taxes
Pretax Operating Profit x (1 - Tax Rate)
Controllable revenues would be included in the performance reports of which of the following types of responsibility centers?
Yes/no
Cost centers:
Investment Centers:
Cost centers: no
Investment centers: yes
The manager of a cost center is only responsible for controllable costs. Thus, controllable revenues would not be included in the performance report of a cost center.
The manager of an investment center is responsible for controllable revenues, controllable costs, and investment funds. Thus, controllable revenues would be included in the performance report of an investment center.
Decentralized firms can delegate authority and yet retain control and monitor managers’ performance by structuring the organization into responsibility centers. Which one of the following organizational segments is most likely to an independent business?
A. Investment center
B. Profit center
C. Cost center
D. Revenue center
A. Investment center
Investment center manager is a manager who can influence revenues, costs, and the level of investment. Investment centers are responsible for investments, revenues, and costs. Performance of investment centers is evaluated not only by its profit but also by relating the profit to its invested capital. Investment Centers are segments that are evaluated as an independent business.
For a given time period, a company had a favorable material quantity variance, a favorable direct labor efficiency variance, and a favorable fixed overhead volume variance. Of the following, the one factor that could not have caused any of the three variances is
A. The purchase of higher quality materials
B. The use of lower-skilled workers
C. The purchase of more efficient machinery
D. An increase in production supervision
B. The use of lower-skilled workers
The use of lower-skilled labor is not likely to lead to a favorable direct labor efficiency variance but more likely to cause this variance to be unfavorable. Lower-skilled labor could also affect the material quantity variance negatively.
The purchase of higher quality materials would lead to a favorable material quantity variance as better quality material would lead to less spoilage/wastage.
The purchase of more efficient machinery would lead to a greater amount of production at the given capacity and hence would lead to a favorable fixed overhead volume variance.
An increase in production supervision would make workers more efficient and hence would contribute to a favorable direct labor efficiency variance.
Predetermined variable overhead rate
Estimated manufacturing overhead cost for the period
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Estimated number of units within the allocation base
Strategic planning, as practiced by most modern organizations, includes all of the following except
A. Identification of long-term key variables including external influences
B. Strategies that will help in achieving long-range goals
C. A long-term focus
D. Analysis of the current month’s actual variances from budget
D. Analysis of the current month’s actual variances from budget
Strategic planning also referred to as long-range planning involves a comprehensive look at an organization in relation to its industry, competitors, and environment and includes external analysis such as identification of long-term key variables including external influences, evaluating strategies that will help in achieving long-range goals and always has a long-term focus.
The analysis of the current month’s actual variances from the budget is considered a part of management control or operational control rather than a part of strategic planning.
For April, Stock Co.’s records disclosed the following data relating to direct labor
* actual cost: $10,000
* Rate variance: 1,000 favorable
* Efficiency variance: 1,500 unfavorable
* Standard Cost: $9,500
For April, actual direct labor hours totaled 1,000. In April, Stork’s standard direct labor rate per hour was..
$11.00
Actual cost: $10,000
Rate variance: 1,000 F
Actual input x Std. price: 1,000 x SP
Efficiency variance: 1,500 U
Std Qty x Std Price = $9,500
1,000 hr x SP = 9500 + 1500
SP = 11,000 / 1,000hr = $11/hr
A company’s standard cost for direct labor are as follows:
Standard quantity: 1 hour per unit
Standard price: $15 per hour
Last month, the company produced and sold 100 units of its product, using 110 direct labor hours at a rate of $16 per hour. What amount is the company’s direct labor efficiency variance for last month?
$150
The direct labor efficiency variance is the difference in actual quantity from the standard quantity of direct labor multiplied by the standard rate (price) per hour.
(Actual quantity - standard quantity) x standard rate per hour
(110 hours - 100 hours) x $15/hour
As the actual hours are greater than the standard hours, the variance is unfavorable.
Jones, a department manager, exercises control over the department’s costs. Following is selected information relating to the department for July:
- Variable factory overhead
- Budgeted based on standard hours allowed: $80,000
- Actual: 85,000
*Fixed factory overhead
- Budgeted: 25,000
- Actual: 27,000
The department’s unfavorable spending variance for July was
$7,000
To compute the spending variance under the three-way analysis of factory overhead, budgeted variable factory overhead based on actual hours (not standard hours allowed) is needed.
Therefore, perhaps the question really intended for the budget (or controllable) variance under the two-way analysis of factory overhead to be computed. The budget (controllable) variance is the difference between actual factory overhead incurred and budgeted factory overhead based on standard hours allowed.
The actual factory overhead incurred is $112,000 (85,000+27,000). The budgeted factory overhead based on standard hours allowed is $105,000 ($80,000+$25,000)
Therefore, the budget (controllable) variance is $7,000 unfavorable (112,000 - 105,000)
Which of the following methods is best suited for evaluating the performance of a firm’s capital in any given year?
A. Internal rate of return
B. Net present value
C. Economic value added
D. Payback
C. Economic Value Added
Economic Value-added (EVA) is best suited for evaluating the performance of firm’s capital in a given year. Economic value added: operating profit - cost of capital = residual wealth i.e. the extra value added after all costs including cost of capital
Internal Rate of Return (IRR), Net Present Value (NPV), and payback are capital budgeting techniques that evaluate the performance of a project or investment over a period of time.
Most firms use return on investment (ROI) to evaluate the performance of investment center managers. If top management wishes division mangers to utilize all assets without regard to financing, the denominator in the ROI calculation will be
A. Total assets employed
B. Total assets available
C. Working capital
D. Working capital plus other assets
B. Total assets available
Total assets available is more inclusive than total assets employed. The difference between the two might be land that is being held for future expansion of the factory. The total assets available is the better choice because the question says all assets. As the division manager has the authority to utilize all assets without regard to financing all the assets available to him would be a better base (denominator) for ROI calculation.
A company’s standard cost for direct labor are as follows:
Standard quantity: 1 hour per unit
Standard price: $15 per hour
Last month, the company produced and sold 100 units of its product, using 110 direct labor hours at a rate of $16 per hour. What amount is the company’s direct labor efficiency variance for last month?
$150
Direct labor efficiency variance is the difference between actual hours and the standard hours allowed for actual production.
(Standard hours for actual production x predetermined overhead rate) - (actual hours x predetermined overhead rate), where standard hours for actual production = 100 hours
(100 x $15) - (110 x $15) = $150 unfavorable
Brent Co. has intracompany service transfers from Division Core, a cost center, to Division Pro, a profit center. Under stable economic conditions, which of the following transfer prices is likely to be most conductive to evaluating whether both divisions have met their responsibilities?
A. Actual cost
B. Standard variable cost
C. Actual cost plus mark-up
D. Negotiated price
B. Standard variable cost
If actual cost is used, the selling division can pass on inefficiencies to the buying division. The same result would occur if actual cost plus a markup is used as the transfer price. Since the selling division is a cost center, negotiated price may not result in the most efficient transfer pricing due to inequities in negotiating power. Standard variable cost should be used since the selling division is a cost center and has no incentive to make a profit on the transfer. Furthermore, with standard variable costing, inefficiencies will not be passed on to the buying division, which is concerned with profits.
The transfer price set by a parent or subsidiary for goods or services most likely can be used by multinational companies to
a. transfer as much of the cost as allowable to the country with the lowest overall tax burden
b. transfer funds from a subsidiary located in a strong-currency country to a subsidiary located in a country with depreciating currency.
c. transfer as much of the cost as allowable to the country with the highest overall tax burden.
d. change the financial statements of the individual subsidiaries
c. transfer as much of the cost as allowable to the country with the highest overall tax burden.
Transfer pricing is the price that is set for intercompany sales to encourage goal congruence among the division managers involved in the transfer.
Currently, most companies set transfer prices primarily to minimize overall corporate taxes.
Corporate taxes would be minimized if maximum profits are allocated to low-tax countries and minimal profits are allocated to high-tax countries. As such they would transfer as much of the cost as allowable to the country with a high tax rate so as to reduce the allocated profits to that country and reduce the tax burden.
