Performance Management

Question 1

Which cost center can be evaluated by ROCE?

Answer 1

Investment Centers

Question 2

Other name for ROCE?

Answer 2

ROI

Question 3

Two performance measures for investment Centers

Answer 3

ROI and ROCE

Question 4

ROI equation

Answer 4

Profit/Capital employed %

I.e. controllable divisional profit/divisional capital employed

Question 5

RI equation

Answer 5

Profit minus notional interest charge for invested capital

Question 6

Omitted variable bias/
Cause and effect bias

Answer 6

Attributing cause to the wrong variable

Question 7

Cognitive bias

Answer 7

Presenting results in the wrong way e.g. infographics

Question 8

Confirmation bias

Answer 8

Confirming exiting beliefs and ignoring contradictions

Question 9

Survivorship bias

Answer 9

Ignoring areas that don’t perform well

Question 10

Imputed interest

Answer 10

Profit - residual income

Question 11

What to do if unlimited capital?

Answer 11

As many separate investments as increases ROI

Question 12

How to work out the optimum selection of investments with different ROIs?

Answer 12

1. Pick the investment with the highest ROI
2. Work out the cumulative ROI of this plus previous investments
3. Repeat with the next highest individual ROI until the cumulative ROI goes down

Question 13

Cumulative ROI

Answer 13

(Profit 1 + Profit 2/Capital 1 + Capital 2)

Question 14

Types of costing methods

Answer 14

1. Specific order
2. Process

Question 15

Types of specific order costing methods

Answer 15

1. Job
2. Batch
3. Contract

Question 16

What is specific order costing good for?

Answer 16

When each cost unit is separately identifiable

Question 17

Job costing

Answer 17

Customers specific requirements
Short duration

Question 18

Contract costing

Answer 18

Separate cost unit
Long duration
Often away from business premises

Question 19

Batch costing

Answer 19

Group of identical items (batch) treated as a cost unit

Question 20

Process (continuous operation) costing

Answer 20

Costing done per period, per cost center
Unit cost = process cost for period/no. units produced
This cost is carried though to next process until product finished

Question 21

Life cycle costing

Answer 21

Takes into account all costs and revenues of a product over entire life span (R&D, training, production, distribution, marketing, retirement/disposal)

Question 22

Target costing

Answer 22

Target cost worked backwards from concept, acceptable selling price and profit margin.

Question 23

JIT costing

Answer 23

Aim to have no inventory
Pull not push system
Consists of JIT purchasing and JIT production