Performance management: Performance measures 2.0

Question 1

True or False and Why?
If a company uses a balanced scorecard approach to the provision of information it will not use ROI or RI as divisional performance measures.

Answer 1

ROI and RI might be used as one of the measures within the financial perspective.

Question 2

True or False and Why?
The RI will always increase when investments earning above the cost of capital are undertaken.

E.g Investment earns 15% and cost of capital is 10%

Answer 2

True.
RI will increase because the additional imputer interest charge will be lower than the additional profit generated.

E.g. The project earns more than it costs!

Question 3

True or False and Why?
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 GC decisions.

Answer 3

False.
Internal business perspective focuses on what processes must a company excel at to achieve our financial and customer objectives.

Question 4

True or False and Why?
An advantage of the RI performance measure is that it facilitates comparisons between investment centers.

Answer 4

False.
This is a disadvantage of RI: Absolute figure so does NOT facilitate comparisons.

Question 5

True or False and Why?
Fixed budgets are not useful for control purposes.

Answer 5

False.
It may be useful where activity levels are NOT prone to change / where significant proportion of costs is fixed, so changes in activity levels don’t affect costs incurred.

Question 6

True or False and Why?
A prerequisite of flexible budgeting is a knowledge of cost behavior patterns.

Answer 6

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

(just like in the flexed budget question)

Question 7

To get a constant year-on-year ROI, what type of book value used in capital employed and depreciation method should be used in the accounting profit should be used?

Answer 7

Capital employed: Gross book value, Accounting profit: Profit after charging depreciation under SLB.
(these won’t change).