Performance Management Part 1

Question 1

Which of the following incentive designs will most likely encourage the use of nonfinancial
measures by a manager?

A. Tying incentives to the overall profit of the firm.
B. Tying incentives to the manager’s individual effort.
C. Tying incentives to the salary level of the manager.
D. All of the answer choices can be equally effective.

Answer 1

Choice “B” is correct.

Managers are more likely to use nonfinancial measures if they are tied to the managers individual effort and, by extension, the manager can control
the outcome.

Choice “A” is incorrect. Tying incentives to the overall profit of the firm links compensation most closely with financial results such that the individual manager may not be as motivated to use non financial measures.

Choice “C” is incorrect. While a bonus on salary is often very effective in motivating performance, it does not link performance to non financial measures.

Choice “D” is incorrect. Forcing alignment of individual effort and incentive compensation is more likely to promote the use of non financial measures than aligning incentives with profits or salary levels.

Question 1

Nonfinancial performance measures are often preferable to financial performance
measures as a means of constructively motivating operational managers since:

A. Nonfinancial performance measures are not controlled by financial records.

B. Financial performance measures are punitive.

C. Nonfinancial measures are more easily associated with operational objectives.

D. Financial performance measures are not tied to operations.

Answer 1

Choice “C” is correct. Nonfinancial measures (such as delivery time, raw materials used or miles driven) are performance features that operational managers intuitively understand and can more easily manage than financial performance measures.

Choice “A” is incorrect. The separation of nonfinancial performance measures from
financial records does not change the effectiveness of those measures for operational managers.

Choice “B” is incorrect. Financial performance measures can be punitive; however, they are not inherently more or less punitive than nonfinancial performance measures.

Choice “D” is incorrect. Financial performance measures provide insight into the financial operations of a business function but may not be fully understood by operational managers.

Question 2

Which of the following performance measures is nonfinancial?

A. Percentage of defective products.

B. Return on investment.

C. Gross profit margin.

D. Economic value-added.

Answer 2

Choice “A” is correct. Computation and reporting of a percentage of defective products is a nonfinancial measure. Typically financial measures deal with costs, revenues, or financial reports. Nonfinancial measures generally focus on operational statistics (such as defective products) rather than items measured in dollars.

Choice “B” is incorrect. Return on investment is based on financial statement amounts
and represents a financial measure, not a nonfinancial measure.
Choice “C” is incorrect. Gross profit margin is based on financial statement amounts
and represents a financial measure, not a nonfinancial measure.
Choice “D” is incorrect. Economic value added is based on financial statement
amounts and represents a financial measure, not a nonfinancial measure.

Question 3

________________ involves identifying standards for critical success factors of a firm. This process will typically entail identifying peers and industry leaders
whose practices represent best-in-class (or world-class) performance standards.

Answer 3

Benchmarking

Question 4

The _____________ represents the difference between the current behavior and the desired standard. Measuring this does not involve evaluating products and services relative to the best possible levels of performance.

Answer 4

performance gap

Question 5

__________________ does not involve comparisons to others’ best practices.

Answer 5

Standard measurement

Question 6

__________________ involves comparing actual results to budgeted results. Benchmarking may be used to set budgets (standards), but the actual management of any this involves determining the cause for why differences between actuals and budget exist.

Answer 6

Variance management

Question 7

Total productivity ratios consider all inputs and _____________________________________.

Answer 7

prices of those inputs

Question 8

_________________ are concerned only with the quantity of a single input (e.g., direct material or direct labor) and do not consider the price of the input.

Answer 8

Partial productivity ratios

Question 9

_______________________ is calculated as the quantity of output produced in a given period divided by the cost of inputs in the same period, not the sales price of outputs.

Answer 9

TPR (Total productivity ratios)

NOTE: Total productivity ratios consider all inputs and prices of those
inputs. Just NOT the sales price of outputs.

Question 10

________________ is calculated as the quantity of output produced divided by quantity of the single input used, not the cost.

Answer 10

PPR (Partial productivity ratios)

NOTE: PPR DOES NOT CONSIDER THE COST OF THE INPUT

Question 11

__________________ presents metrics covering multiple performance dimensions within a company.

Answer 11

The balanced scorecard

Question 11

Performance reports should be formatted and designed to meet organizational needs. In this regard, performance reports normally include all of the following, except:

A. Exceptional items that are controllable.
B. Specific time horizons.
C. A user focus.
D. Strategic plans

Answer 11

Choice “D” is correct.
Strategic plans are broad-based and long-term in nature.
Performance reports are much more specific and shorter term. A performance report
would not normally include strategic plans.

Question 11

MCQ-03875
Quality programs normally include a number of techniques to find and analyze problems.
The technique commonly used to determine zero defects and goalpost conformance is called a:

A. Control Chart.
B. Pareto Diagram.
C. Fishbone Diagram.
D. Value Chain Analysis.

Answer 11

Choice “A” is correct. A control chart shows the performance of a particular process in relation to acceptable upper and lower limits of deviation. Performance within the limits is termed statistical control. Processes are designed to ensure that performance consistently falls within the acceptable range of error.

Question 12

A ___________________ represents an individual and cumulative graphical analysis of errors by type.

Answer 12

Pareto diagram

Question 12

A ___________________ describes a process, the contributions to the process, and the potential problems that could occur at each phase of a process. The chronological sequence of events is represented by a single horizontal line while
the contributions to the process are represented by diagonal lines.

Answer 12

fishbone diagram

Question 13

A _____________________ is a macro level flowchart that shows the relationship between broad functional areas, the product delivered by the organization,
and manner in which value is added at each link in the chain.

Answer 13

value chain analysis

Question 14

The quality control tool used to evaluate error rates and process improvement issues in a
manner that combines both a histogram and a line graph is referred to as a:

A. Fishbone diagram.
B. Pareto diagram.
C. Control chart.
D. Kanban.

Answer 14

Choice “B” is correct. A Pareto diagram illustrates the cumulative effect of errors or process issues in both a line graph that accounts for all errors or issues and a histogram that displays individual errors or issues in relation to all other issues and errors.

Question 15

____________________ is Japanese for card and is used as a supply chain and inventory control mechanism.

Answer 15

Kanban

Question 16

MCQ-03878
Quality programs normally include a number of techniques to find and analyze problems. The technique commonly used to analyze the source of potential problems and their locations within a process is called a:

A. Control Chart.
B. Pareto Diagram.
C. Fishbone Diagram.
D. Value Chain Analysis.

Answer 16

Choice “C” is correct.
A fishbone diagram describes a process, the contributions to the process, and the potential problems that could occur at each phase of a process. The process is represented by a single horizontal line while the contributions to the process
are represented by diagonal lines that create the image of a fishbone. Fishbone diagrams provide a framework for managers to analyze the problems that contribute to the occurrence of defects.

Question 17

Which of the following is true regarding Pareto diagrams?

A. They graphically display the impact of measuring goalpost conformance.

B. They provide a framework for a manager to analyze the problems that contribute to the occurrence of defects.

C. Quality control issues are displayed in order of least to most frequent.

D. They display the individual and cumulative frequency of quality issues, defects, or problems.

Answer 17

Explanation
Choice “C” is correct. Manufacturing overhead is not an element of the manufacturing
processing you would expect to see in a cause and effect (fishbone) diagram. It is an
allocated cost.
Choice “A” is incorrect. Manpower, machinery, methods, and materials are commonly
identified elements of manufacturing processes that would be used to evaluate the
source of defects. Manpower is an element of the manufacturing process typically
presented on a cause and effect (Fishbone) diagram

Question 18

MCQ-03856
Strategic Business Units (SBUs) are classified into different types based on the responsibility levels assigned to their managers. Which SBU has the least amount of responsibility?

A. Cost SBU.
B. Revenue SBU.
C. Profit SBU.
D. Investment SBU.

Answer 18

Explanation
Choice “A” is correct. Managers in a cost SBU only have responsibility for one dimension of financial performance and it is one that they control entirely, the level of costs incurred.

Choice “B” is incorrect. Revenue SBUs represent a greater responsibility than cost SBUs. Managers of a revenue SBU only have responsibility for one dimension of financial performance, but revenue generation is not under the control of the managers. Clearly the uncertainty associated with generating sales increases the risk and difficulty associated with the manager’s responsibility.

Choice “C” is incorrect. Profit SBUs represent a greater responsibility than either cost
or revenue SBUs. Profit SBUs require the manager to maintain control of revenues,
and costs AND the relationship between the two.

Choice “D” is incorrect. Investment SBUs represent the organizational segment with
the highest level of responsibility. Managers not only consider cost, revenues and their
relationship, but also the relationship between profits generated and assets invested.

Question 19

MCQ-03866
Responsibility accounting defines an operating center that is responsible for revenue and
costs as a(n):

A. Profit center.
B. Revenue center.
C. Operating unit.
D. Investment center.

Answer 19

Choice “A” is correct. A profit center is responsible for revenue and costs.

Choice “B” is incorrect. A revenue center is responsible for revenue only.

Choice “C” is incorrect. An operating unit is typically a division, which is not precisely defined.

Choice “D” is incorrect. An investment center is responsible for revenues, expenses, and invested capital.

Question 20

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 like an independent business?

A. Revenue center.
B. Profit center.
C. Cost center.
D. Investment center.

Answer 20

Choice “D” is correct. An investment center is most like an independent business.
Investment centers are responsible for revenues, expenses, and invested capital.

Choice “A” is incorrect. A revenue center is responsible for revenues only.

Choice “B” is incorrect. A profit center is responsible for revenues and expenses, but
not invested capital.

Choice “C” is incorrect. A cost center is responsible for costs only

Question 21

A successful responsibility accounting reporting system is dependent upon:

A. The correct allocation of controllable variable costs.
B. Identification of the management level at which all costs are controllable.

C. The proper delegation of responsibility and authority.

D. A reasonable separation of costs into their fixed and variable components since fixed costs are not controllable and must be eliminated from the responsibility report.

Answer 21

Choice “C” is correct. Responsibility for costs, and the authority to do something about them, are necessary for a successful responsibility accounting system.

Choice “A” is incorrect. Allocation of variable costs is easy; allocation of other controllable costs is harder.

Choice “B” is incorrect. All costs are not controllable at one level.

Choice “D” is incorrect. All costs, in the long run, are variable, and controllable at some
level.

Question 22

__________________ is associated with performance reports and a focus on revenues and costs that are within the control of the manager being evaluated. Managers are not held accountable for revenues and costs that are outside their control.

Answer 22

Responsibility accounting

Question 23

Fairmount, Inc. uses an accounting system that charges costs to the manager who has been delegated the authority to make the decisions incurring the costs. For example, if the sales manager accepts a rush order that will result in higher than normal manufacturing costs, these additional costs are charged to the sales manager because the authority to accept or decline the rush order was given to the sales manager. This type of accounting system is known as:

A. Responsibility accounting.
B. Functional accounting.
C. Transfer price accounting.
D. Contribution accounting.

Answer 23

Choice “A” is correct.

Responsibility accounting is a system of accounting that recognizes various responsibility or decision centers throughout an organization and
reflects the plans and actions of each of these centers by assigning particular revenues and costs to the one having the responsibility for making decisions about these revenues and costs.

Question 24

__________ centers generate revenues and incur costs, so controllable revenues would be included in a ____________center’s performance report. .

Answer 24

Profit Profit

Question 25

____________________ centers do not generate revenues and, therefore would not have any revenues to include in a performance report

Answer 25

Cost

Question 26

Boyle, Inc. makes two products, X and Y that require allocation of indirect manufacturing
costs. The following data was compiled by the accountant before making any allocations:
Product X Product Y
Quantity produced 10,000 20,000
DM labor hours 15,000 5,000
Setup hours 500 1,500

The total cost of setting up manufacturing processes and equipment is $400,000. The company uses a job-costing system with a single indirect cost rate. Under this system, allocated costs were $300,000 and $100,000 for X and Y, respectively. If an activity-based system is used, what would be the allocated costs for each product?

Product X Product Y

A. $100,000 $300,000
B. $200,000 $200,000
C. $150,000 $250,000
D. $250,000 $150,000

Answer 26

Choice “A” is correct.

The setup hours are used because neither quantity produced nor direct manufacturing hours are activities according to Activity Based Costing.

25 % to product x and 75 % to product y

Question 27

MCQ-08286
Which of the following performance measures is nonfinancial?

A. Percentage of defective products.
B. Return on investment.
C. Gross profit margin.
D. Economic value-added.

Answer 27

Choice “A” is correct. Computation and reporting of a percentage of defective products is a nonfinancial measure. Typically financial measures deal with costs, revenues, or financial reports. Nonfinancial measures generally focus on operational statistics (such as defective products) rather than items measured in dollars.

Choice “B” is incorrect. Return on investment is based on financial statement amounts and represents a financial measure, not a nonfinancial measure.

Choice “C” is incorrect. Gross profit margin is based on financial statement amounts
and represents a financial measure, not a nonfinancial measure.

Choice “D” is incorrect. Economic value added is based on financial statement
amounts and represents a financial measure, not a nonfinancial measure

Question 28

_____________________ is used to determine whether performance is meeting standards. The calculation takes net operating profit after taxes and subtracts a “required return.”

Answer 28

Economic value added (EVA)

Question 29

______________________ involves collecting, assessing, and presenting both financial and nonfinancial data for an organization in order to determine whether its strategic goals are being met.

Answer 29

Performance measurement

Question 30

Strategic plans are broad-based and __________-term in nature.

Performance reports are much more specific and ________ term.

A performance report would not normally include strategic plans.

Answer 30

long

shorter

Question 31

Tooling changes is an example of an _____________________.

Answer 31

internal failure cost

Question 32

Lost customers, warranty costs, and liability
claims are examples of _________________.

Answer 32

external failure costs

Question 33

MCQ-03897
In recent years, much attention has been placed on product quality and total quality control.
Which one of the following items would not normally be considered a cost of quality?

A. Costs incurred in detecting defective products during production.
B. Costs incurred in detecting defective products produced before they are shipped
to customers.
C. Costs incurred after defective products have been shipped to customers.
D. Costs incurred in shortening production lead times and achieving on-time

Answer 33

Choice “D” is correct. Costs incurred in shortening product lead times and achieving on-time deliveries are measures of performance and not a cost of quality.
Choices “A”, “B”, and “C” are incorrect, which are all costs of quality.

Question 34

________________ is the most rigorous standard of quality because it represents a perfect, or ideal, level of compliance.

Answer 34

Absolute conformance

Question 35

Because it represents achievement of compliance within an established range of
tolerable error, __________________ is considered less rigorous than absolute
conformance.

Answer 35

goalpost conformance

Question 36

____________________ are those preventative and appraisal costs invested to detect and prevent errors and do not represent quality standards.

Answer 36

Conforming costs

Question 37

_________________ are those internal and external failures associated with correcting quality errors associated with non-compliance and do not represent quality standards.

Answer 37

Nonconforming costs

Question 38

Employee training costs are an example of _________________ costs.

Answer 38

prevention

Question 39

Statistical quality checks, testing, and
inspection are examples of _________________ costs.

Answer 39

appraisal

Question 40

Tooling changes are an example of _________________ failure costs.

Lost customers are an example of __________________failure cost.

Testing is an example of __________________ costs.

Preventive maintenance is an example of _________________ costs.

Answer 40

internal

external

appraisal

prevention

Question 41

Which of the following is an example of prevention costs?

A. Lost customers.
B. Testing.
C. Tooling changes.
D. Redesign of processes.

Answer 41

Choice “D” is correct. Redesign of processes is an example of prevention costs.

Choice “A” is incorrect. Lost customers are an example of external failure cost.

Choice “B” is incorrect. Testing is an example of appraisal costs.

Choice “C” is incorrect. Tooling changes is an example of internal failure cost.

Question 42

Inspection costs can be _______________ costs, if they are incurred for raw materials
coming in, or _______________ costs, if they are for products prior to movement to the next department or to the final customer.

Answer 42

prevention

appraisal

Question 43

_________________compares what actually happened with what was expected to happen (budgeted). This analysis does not address product quality but may be used to provide context as to where quality may have differed from expectations.

Answer 43

Variance analysis

Question 44

__________________________ should occur before production starts, rather than just before production is completed.

Answer 44

Bottleneck identification

Question 45

___________________ analysis is an internal failure cost performed after production is completed.

Answer 45

Scrap cost