Performance Management Flashcards

1
Q

In the simple control cycle, what comes after measure outputs and feeds into monitor and control?

A - Feedback
B - Fixed costs
C - Activity levels
D - Budgets and standards

A

D - Budgets and standards

Resources feeds into operations
Operations feeds into measure outputs
Measure outputs feeds into budgets and standards and monitor and control
Monitor and control feeds into resources

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2
Q

Which of the following is not a feature of effective feedback reports?

A - Made available in a timely fashion
B - Produced on a regular basis
C - Distributed to as many managers as possible
D - Sufficiently accurate for the purpose intended

A

C - Distributed to as many managers as possible

Reports should be communicated to the manager who has responsibility and authority to act on the
information. There is no point in distributing reports to managers who cannot act on the information
contained therein.

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3
Q

Which of the following describes exception reporting?

A - Reporting of exceptional activities within an organisation
B - Reporting only controllable matters to managers
C - Reporting only of variances which exceed a certain value
D - Reporting of all variances to the relevant manager

A

C - Reporting only of variances which exceed a certain value

Areas that are conforming to plan are given less prominence in control reports, allowing managers to focus on areas requiring attention

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4
Q

Which two of the following statements about management control reports are correct?

A - Reports should be completely accurate
B - Reports should be clear and comprehensive
C - Reports should not include information about uncontrollable items
D - Based on the information contained in reports, managers may decide to do nothing.

A

B - Reports should be clear and comprehensive
D - Based on the information contained in reports, managers may decide to do nothing.

Management reports should be sufficiently accurate for the purpose intended. Complete accuracy
might not be possible, or might take so long to attain that the value of the information is diminished
by its late arrival

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5
Q

Which of the following is not a style of performance evaluation identified in Hopwood’s studies?
A - Budget constrained
B - Non-accounting
C - Revenue focused
D - Profit conscious

A

C - Revenue focused

Although managers might focus on the achievement of revenues in the context of a budget
constrained or profit conscious style of evaluation, ‘revenue focused’ is not a specific style identified
by Hopwood.

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6
Q

Select which of the following styles of using budgetary information is most likely to lead to each of the situations described.

Job-related tension is caused by which of the following styles:
A - Budget constrained
B - Profit conscious
C - Non-accounting

Less focus on cost control is caused by which of the following styles:
D - Budget constrained
E - Profit conscious
F - Non-accounting

Incidence of budget bias is caused by which of the following styles:
G - Budget constrained
H - Profit conscious
I - Non-accounting

A

A - Budget constrained
With a budget constrained style of evaluation, the focus is on meeting the budget on a short-term
basis. Compared with the other styles of evaluation this is more likely to lead to job-related tension
and budget bias

F - Non-accounting
With a non-accounting style of evaluation the budgetary information is not as important in the
evaluation of a manager’s performance. Compared with the other styles of evaluation there will be
less focus on cost control.

G - Budget constrained
With a budget constrained style of evaluation the focus is on meeting the budget on a short-term
basis. Compared with the other styles of evaluation this is more likely to lead to job-related tension
and budget bias.

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7
Q

A company have recently implemented a new budgetary planning and control system after several years of trading

Having made a significant investment in the new system, the company’s management team were
surprised to learn that it is not designed to do which of the following?

A - Improve control of actual performance
B - Improve coordination of activities
C - Improve gross profit
D - Improve communication of ideas and plans

A

C - Improve gross profit

A new budgetary planning and control system is not designed to improve actual performance levels.
It is designed to improve the control of actual performance, the coordination of activities, and the
communication of ideas and plans

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8
Q

Which of the following is a reason for adopting a decentralised rather than a centralised organisational structure?

A - Improved goal congruence between the goals of divisional management and the goals of the organisation
B - Rapid management response to changes in the trading environment
C - Availability of objective performance measures
D - Improved communication of information between the group’s managers

A

B - Rapid management response to changes in the trading environment

One of the advantages of decentralisation is the opportunity for a speeder response to problems
and situations as a result of divisional managers’ more detailed and ‘local’ knowledge

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9
Q

Division P is an investment centre within PC Ltd. Over which of the following is the manager of division P likely to have control?

1) Transfer prices
2) Level of inventory in the division
3) Discretionary fixed costs incurred in the division
4) Apportioned head office costs

A - 1, 2, 3, and 4
B - 1, 2, and 3
C - 1 and 2
D - 1 only

A

B - 1, 2, and 3

Apportioned head office costs are not controllable by the manager of an investment centre.
Discretionary fixed costs (those which do not have to be incurred in the short term, such as
advertising and training) are within the manager’s control since they can be increased or reduced at
fairly short notice

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10
Q

The manager of a trading division has complete autonomy regarding the purchase and use of non-current assets. The division operates its own credit control policy in respect of its customers but the group operates a central purchasing function through which the division places all orders with suppliers and invoices are paid by head office.

Inventories of goods for sale are kept in central stores, from which local divisions call off requirements for local sales on a monthly basis into a local inventory.

Divisional performance is assessed on the basis of controllable residual income. The company requires a rate of return of ‘R’

Using the following symbols:
Divisional non-current assets N
Apportioned net book value of central stores S

Divisional working capital
Receivables D
Local inventory I
Bank B
Payables (P)
—-
= W

C - Divisional contribution
(F) - Controllable fixed costs
(H) Head office charges

G = Divisional net income

Which of the following formulae calculates the division’s controllable residual income?

A - [C – F] – [(N + D + B) × R]
B - [C – F] – [(N + D + I + B) × R]
C - C – [(N + D) × R]
D - G – (T × R)

A

B - [C – F] – [(N + D + I + B) × R]

The fixed costs are labelled as controllable therefore they should be deducted from the contribution,
but the head office charges should not. The divisional manager cannot exercise control over the
latter costs and therefore should not be held responsible for them.

The divisional manager is responsible for the non-current assets and all of the current assets.
Although inventories of goods for sale are kept in central stores, the division calls off its requirements
on a monthly basis. The divisional manager is therefore responsible for the amount of inventory held

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11
Q

Division D of Distan Ltd is considering a project which will increase annual profit by £15,000 but will require average receivables levels to increase by £100,000. The company’s target return on investment is 10% and the imputed interest cost of capital is 9%. Division D currently earns a return on investment of 13%

Would the return on investment (ROI) and residual income (RI) performance measures motivate the
manager of Division D to act in the interest of the Distan company as a whole?

ROI
A - Manager would wish to act in the interest of Distan Ltd
B - Manager would not wish to act in the interest of Distan Ltd

RI
C - Manager would wish to act in the interest of Distan Ltd
D -

A
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12
Q

Division D of Distan Ltd is considering a project which will increase annual profit by £15,000 but will require average receivables levels to increase by £100,000. The company’s target return on investment is 10% and the imputed interest cost of capital is 9%. Division D currently earns a return on investment of 13%

Would the return on investment (ROI) and residual income (RI) performance measures motivate the
manager of Division D to act in the interest of the Distan company as a whole?

ROI
A - Manager would wish to act in the interest of Distan Ltd
B - Manager would not wish to act in the interest of Distan Ltd

RI
C - Manager would wish to act in the interest of Distan Ltd
D - Manager would not wish to act in the interest of Distan Ltd

A

A - Manager would wish to act in the interest of Distan Ltd
C - Manager would wish to act in the interest of Distan Ltd

The project is acceptable to the company as a whole because the RI is positive and the ROI exceeds
the target return of 10%.
The manager of Divison D will be willing to undertake the project whichever performance measure is used, since both the ROI and the RI will increase. Therefore, both measures will motivate the divisional manager to act in the interest of the company as a whole

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13
Q

Division B of a national house-building group is projected to earn profits of £4.5 million in the current year on capital employed at the year end of £25 million. The division has been set a target return on investment (ROI) of 20%.

The manager of division B is considering disposing of some slow-moving houses which have a full market value of £16 million, but are held in the books at cost of £12 million, for a reduced figure of £14 million.

Which of the following statements is true?
A - The revised divisional ROI will be below 20% and the manager will make a goal congruent decision
B - The revised divisional ROI will be above 20% and the manager will not make a goal congruent decision
C - The revised divisional ROI will be below 20% and the manager will not make a goal congruent decision
D - The revised divisional ROI will be above 20% and the manager will make a goal congruent decision

A

B - The revised divisional ROI will be above 20% and the manager will not make a goal congruent decision

Revised profit:
Current projection = £4.5m
Profit on sale of houses (14m - 12m) = £2m

6.5 million

Revised divisional investment
Current level = £25 million
Cash from sales of houses = £14 million
Less book value of houses = (£12 million)
—–
= 27 million

Revised ROI = (6.5/27) x 100% = 24.1%

The manager would wish to undertake the transaction since the projected ROI of (4.5/25) 18% would
otherwise not satisfy the target ROI of 20%. However, this is not a goal congruent decision since the
houses would be sold for £2 million below their market value of £16 million

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14
Q

On the last day of the financial year a division has net assets with a total carrying amount of £300,000. The return on investment for the division is 18%.

The division manager is considering selling a non-current asset immediately before the year end. The
non-current asset has a carrying amount of £15,000 and will sell for a profit of £5,000

What would be the division’s return on investment (ROI) immediately after the sale of the asset at the
end of the year?
A - 17.7%
B - 19.3%
C - 20.3%
D - 20.7%

A

B - 19.3%

Original profits £300,000 × 18% = 54,000
Profit on sale = 5,000
Revised profit = 59,000

Original net asset value = 300,000
Less carrying amount of asset sold = (15,000)
Plus cash received from sale of asset = 20,000
—-
305,000

Revised ROI after sale of asset = (£59,000/£305,000) × 100% = 19.3%

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15
Q

Which of the following is not a perspective that is monitored by the balanced scorecard approach to performance measurement?

A - Financial
B - Customer
C - Supplier
D - Innovation and learning

A

C - Supplier

The supplier perspective is not one of the four perspectives of the balanced scorecard. Aspects of a
supplier relationship would be monitored, if appropriate, within the internal business perspective

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16
Q

Indicate which of the following statements are true:

1) If a company uses a balanced scorecard approach to the provision of information it will not use ROI or residual income as divisional performance measures
2) The residual income will always increase when investments earning above the cost of capital are undertaken
3) The internal business perspective of the balanced scorecard approach to the provision of information is concerned only with the determination of internal transfer prices that will encourage goal congruent decisions
4) An advantage of the residual income performance measure is that it facilitates comparisons between investment centres.

A - 1 only
B - 2 only
C - 3 only
D - 1 and 4 only

A

B - 2 only

It is true as the residual income will increase because the additional imputed interest charge will be lower than the additional profit generated

17
Q

Which of the following describes a flexible budget?

A - A budget comprising variable production costs only
B - A budget which is updated with actual costs and revenues as they occur during the budget period
C - A budget which shows the costs and revenues at different levels of activity
D - A budget which is prepared using a computer spreadsheet model

A

C - A budget which shows the costs and revenues at different levels of activity

A flexible budget recognises different cost behaviour patterns and is designed to change as the volume of activity changes.
A flexible budget includes both fixed and variable costs, and identifies them separately.

18
Q

Which of the following statements is/are correct?

1) Fixed budgets are not useful for control purposes
2) A prerequisite of flexible budgeting is a knowledge of cost behaviour patterns.
3) Budgetary control procedures are useful only to maintain control over an organisation’s expenditure

A - 1, 2, and 3
B - 1 and 2 only
C - 1 and 3 only
D - 2 only

A

D - 2 only

2) A prerequisite of flexible budgeting is a knowledge of cost behaviour patterns

Fixed and variable costs must be separately identified so that the allowance for variable costs may be flexed according to the actual activity level.

19
Q

A company manufactures a single product and has drawn up the following flexed budget for the year.

60%:
Variable materials: 120,000
Variable labour: 90,000
Production Overhead: 54,000
Other overhead: 40,000

Total cost = 304,000

70%:
Variable materials: 140,000
Variable labour: 105,000
Production Overhead: 58,000
Other overhead: 40,000

Total cost = 343,000

80%
Variable materials: 160,000
Variable labour: 120,000
Production Overhead: 62,000
Other overhead: 40,000

Total cost = 382,000

What would be the total cost in a budget that is flexed at the 77% level of activity?
A - £330,300
B - £370,300
C - £373,300
D - £377,300

A

B - £370,300

Variable material cost per 1% activity = £2,000
Variable labour cost per 1% activity = £1,500

Production overhead:
At 60% activity 54,000
At 80% activity 62,000
Change 20% = 8,000

Variable cost per 1% change in activity is (£8,000 / 20) = £400

Substituting in 80% activity
Variable cost = 80 × £400 = 32,000
Total cost = 62,000
————–
Therefore fixed cost = 30,000

Other overhead is a wholly fixed cost

Budgeted flexed at 77% level of activity

Variable material 77 × £2,000 = 154,000
Variable labour 77 × £1,500 = 115,500
Production overhead
Variable 77 × £400 = 30,800
Fixed = 30,000
Other overhead = 40,000
—–
370,300

20
Q

Within decentralised organisations there may be cost centres, investment centres and profit centres.
Which of the following statements is true?

A - Cost centres have a higher degree of autonomy than profit centres.
B - Investment centres have the highest degree of autonomy and cost centres have the lowest.
C - Investment centres have the lowest degree of autonomy.
D - Profit centres have the highest degree of autonomy and cost centres have the lowest.

A

B - Investment centres have the highest degree of autonomy and cost centres have the lowest.

Cost centres have the lowest degree of autonomy with managers only able to control costs. Profit
centres have a higher degree of autonomy as managers can not only control costs but can also
control sales prices and revenue. Investment centres have the highest degree of autonomy as
managers can not only control costs and revenues but can also make investment decisions not open
to managers in either of the other two centres.

21
Q

A manager of a trading division of a large company has complete discretion over the purchase and use of non-current assets and inventories. Head Office keeps a central bank account, collecting all cash from receivables and paying all suppliers. The division is charged a management fee for these services. The performance of the manager of the division is assessed on the basis of her controllable residual income. The company requires a rate of return of ‘R’. Using the following symbols:

Divisional non-current assets = F
Divisional working capital = D (receivables) + S (inventory) - (L) (payables) = W
F + W = Z (divisional net assets)
P = divisional profits
(M) = Head office management charges

= N - Divisional net profit

Which of the following is the correct formula for calculating the controllable residual income of the
division?
A - P – [(F + S) × R]
B - N – [(F + S) × R]
C - N – (Z × R)
D - P – (Z × R)

A

A - P – [(F + S) × R]

Controllable residual income is defined as controllable profit less the ‘cost of capital’ used in the business, to the extent that capital is controllable.
Controllable profit is not N (as management cannot control the head office management charges) but is P.

The cost of capital will be R multiplied by the controllable capital. As head office collects cash from receivables and pays suppliers then D and L do not form part of controllable capital. The division has complete control over non-current assets (F) and inventory (S) and therefore controllable capital is (F + S). The ‘cost of capital’ is therefore (F + S) × R.
The controllable residual income is therefore P – [(F + S) × R].

22
Q

Which of the following sentences best describes what is necessary for a responsibility accounting system to be successful?

A - Each manager should know the criteria used for evaluating his or her own performance.
B - The details on the performance reports for individual managers should add up to the totals on the report of their superior.
C - Each employee should receive a separate performance report
D - Service department costs should be apportioned to the operating departments that use the service.

A

A - Each manager should know the criteria used for evaluating his or her own performance.

Under a responsibility accounting system, it is imperative that each manager knows what is expected
of them. The criteria used for evaluation of their performance must therefore be known.

23
Q

Division X of Martext Ltd produced the following results in the last financial year:

Net profit: 400,000
Average net assets: 2,000,000

For evaluation purposes all divisional assets are valued at original cost. The division is considering a
project which will increase annual net profit by £30,000, but will require average inventory levels to
increase by £100,000 and fixed assets to increase by £100,000. Martext Ltd imposes a 16% capital
charge on its divisions.

Given these circumstances, will the evaluation criteria of return on investment (ROI) and residual
income (RI) motivate division X managers to accept the project?

A - ROI: No; RI; Yes
B - ROI: Yes; RI; Yes
C - ROI: No; RI; No
D - ROI: Yes; RI: No

A

C - ROI: No; RI; No

Current ROI is 400,000/2,000,000 = 20%
Project ROI = 30,000/200,000 = 15%, so reject as overall result would fall below 20%.
Project RI = 30 – (0.16 × 200) = (2), so reject

Failing to evaluate the project separately eg, combining it with existing results would produce an ROI
in excess of 16% and a positive RI which may have led you to say yes

24
Q

Ulster plc estimates that the net cash flows associated with a new piece of equipment will be equal in each of the five years of the asset’s life

In assessing performance, Return on Investment (ROI) is used, but the figures for capital employed
and accounting profit have come under scrutiny.

Which methods of stating these two components of ROI will provide figures which are constant from
year to year over the five-year life of this new asset?

A - Capital employed: Gross book value; Accounting profit: Profit after charging depreciation on a reducing balance basis
B - Capital employed: Gross book value; Accounting profit: Profit after charging depreciation on a straight-line basis
C - Capital employed: Net book value; Accounting profit: Profit after charging depreciation on a straight-line basis
D - Capital employed: Net book value Accounting profit: Profit after charging depreciation on a reducing balance basis

A

B - Capital employed: Gross book value; Accounting profit: Profit after charging depreciation on a straight-line basis

To get a constant ROI both profits and capital should be constant. Reducing balance depreciation
would increase profits over the life. Net book value would decrease the capital figure.

25
Q

Consider the following statements:
1) Cloud accounting software allows multi-user access
2) Cloud accounting software is more expensive than accounting software packages.

Which of the following is correct with regards to the statements above?
A - 1 and 2 are correct
B - 1 and 2 are incorrect
C - 1 is correct and 2 is incorrect
D - 2 is correct and 1 is incorrect

A

C - 1 is correct and 2 is incorrect

Accounting information in the cloud can be accessed from anywhere, at any time, from a browser or
mobile device and can be accessed by multiple users at once.

Cloud applications are usually rented rather than purchased meaning that there are no upfront costs.
In addition to this, costs such as maintenance and software upgrades are borne by the supplier.

26
Q

Which two of the following are true when management information is provided by a shared service centre (SSC)?

A - Management information quality is improved as best practice can be implemented
B - There is a more consistent management of business data
C - Specific finance issues affecting individual departments will be taken into account
D - The costs of providing management information will increase

A

A - Management information quality is improved as best practice can be implemented
B - There is a more consistent management of business data

Knowledge sharing in a SSC should lead to an improvement in quality of the service provided.

A SSC allows standard approaches to be adopted across the organisation leading to more consistent
management of business data

One of the disadvantages of having a SSC instead of individual finance departments is the loss of
business specific knowledge.

One of the main reasons why businesses decide to implement a shared service centre is to reduce the costs of functions such as the finance function

27
Q

When a company decides to use cloud accounting, which of the following does it no longer need?

A - Accounting software update manager
B - Trained accounts staff
C - Management reporting timetables
D - Internet access

A

A - Accounting software update manager

Although cloud accounting applications are designed for ease of use, a company will still need
trained accounting staff (option B), and it will still have its own internal management reporting timetables to adhere to (option D). Internet access is vital for cloud accounting applications (option D). However, it will no longer need to worry about the management of accounting software updates, as the provider will include that in its subscription fee (option A).

28
Q

The shared service centre (SSC) of Oilspill Ltd operates its payroll, finance and project management functions. It has adopted the balanced scorecard for measuring its performance.

Which two of the following would be appropriate for the SSC to use as performance measures in the
‘customer perspective’ quadrant?

A - Cost per accounting transaction processed
B - Time saved updating payroll file for overtime payments
C - Number of complaints about processing delays
D - Number of new projects set up
E - Training days per employee
F - Percentage of reports issued to department heads on time

A

C - Number of complaints about processing delays
F - Percentage of reports issued to department heads on time

Options C and F focus on the internal customer. Number of complaints and reports delivered todepartment heads on time will both measure customer satisfaction levels.

29
Q

Ashbyrn Ltd is analysing customer services in all divisions. For the last six months, it has asked all of its customers to rate the service anonymously using a scoring system of 1 to 3, with 3 being happy, 2 being neither happy nor unhappy and 1 being unhappy. The data collected was presented using a table:

Division A
Percentage of customers who replied: 65
Percentage who rated service as a 3: 58

Dvision B
Percentage of customers who replied: 70
Percentage who rated service as a 3: 70

Division C
Percentage of customers who replied: 35
Percentage who rated service as a 3: 85

Division D
Percentage of customers who replied: 50
Percentage who rated service as a 3: 40

Ashbyrn Ltd concluded that Division C was providing the best customer service

Which of the following statements is/are true?
1) The way the data was collected has introduced bias
2) The data was presented in a way to mislead
3) The conclusion reached is flawed

A - 1 and 2 only
B - 2 and 3 only
C - 1 and 3 only
D - 3 only

A

D - 3 only

The data collection system was simple, so no bias should have been introduced.

The data is presented in a simple table and is therefore not misleading.

The conclusion reached is flawed because it has not taken into account the fact that only 35% of Division C customers responded to the survey.

30
Q

A manager read on the internet that sales of its product are expected to increase by 40% next year. They then read a different article that said that sales of its product are expected to increase by 25% next year, and another that suggested 22%. They decided to budget for an increase in 40%. A year later it was confirmed that sales had increased by 22%.

What type of bias affected the manager’s decision making?
A - Survivorship
B - Anchoring
C - Self-selection
D - Omitted variable

A

B - Anchoring

The manager has relied on the first percentage increase that they came across and this amount has
anchored the decision