Performance Measures and Management Techniques

Question 1

Performance Measures and Management Techniques

What are the components of a Balanced Scorecard?

Answer 1

Performance Measures and Management Techniques

Components of a Balanced Scorecard

1) Strategic Objectives
2) Performance Measures
3) Baseline Performance
4) Targets
5) Strategic Initiatives

Question 2

Performance Measures and Management Techniques

What are the Four Perspectives of a Balanced Scorecard?

Answer 2

Performance Measures and Management Techniques

Four Perspectives of a Balanced Scorecard

1. Financial Perspective
2. Customer Perspective
3. Intern Business Processes Perspective
4. Learning and Growth.

Question 3

Performance Measures and Management Techniques

How is residual income calculated?

Answer 3

Performance Measures and Management Techniques

RI = Income - Required Rate of Return

RI = Net Income - (Required Rate of Return x Invested Capital)

Question 4

Performance Measures and Management Techniques

Calculate Return on Assets

Answer 4

Performance Measures and Management Techniques

Return on Assets = Net Income
__________________
Average Total Assets

Question 5

Performance Measures and Management Techniques

Calculate the Receivables Collection Period

Answer 5

Performance Measures and Management Techniques

Recv Collection Period = Average Receivables
__________________
Credit Sales per Day

Question 6

Performance Measures and Management Techniques

Calculate Profit Margin

Answer 6

Performance Measures and Management Techniques

Profit Margin = Net Income
___________
Net Sales

Question 7

Performance Measures and Management Techniques

Define Quick Ratio

Answer 7

Performance Measures and Management Techniques

Quick Ratio = Current Assets- Inventory
____________________
Current Liabilities

Question 8

Performance Measures and Management Techniques

Define Operating Profit Margin

Answer 8

Performance Measures and Management Techniques

Operating Profit Margin = (Operating Profit/ Sales)

Operating Profit = Sales- COGS - General/ admin exp

Do not include taxes/ interest expense in operating profit

Question 9

Performance Measures and Management Techniques

Define Investment Turnover

Answer 9

Performance Measures and Management Techniques

Investment Turnover = Sales/ Average Investment

Question 10

Performance Measures and Management Techniques

Define Inventory Turnover

Answer 10

Performance Measures and Management Techniques

Inventory Turnover = COGS/ Average Inventory

Question 11

Performance Measures and Management Techniques

Define Gross Margin

Answer 11

Performance Measures and Management Techniques

Gross Margin = Gross Profit / Net Sales

Gross Profit= Net Sales - COGS

Question 12

Performance Measures and Management Techniques

Define Free Cash Flow (Think Statement of Cash Flows)

Answer 12

Performance Measures and Management Techniques

Net Operating Income after taxes
+ Depreciation Expense
- Change in Net Working Capital
- Capital Expenditures

= Free Cash Flow

Question 13

Performance Measures and Management Techniques

Define Economic Value Added Amount (EVA)

Answer 13

Performance Measures and Management Techniques

EVA = Net Op Profit after taxes- After Tax WACC x Invested Capital

Question 14

Performance Measures and Management Techniques

Define Debt Ratio

Answer 14

Performance Measures and Management Techniques

Debt Ratio = Amount Debt Finance / Total Assets

Question 15

Performance Measures and Management Techniques

Define Book Value per Share

Answer 15

Performance Measures and Management Techniques

Book Value per Share = Common Stockholders Equity / Outstanding Shares

Question 16

Performance Measures and Management Techniques

Define Average Collection Period

Answer 16

Performance Measures and Management Techniques

Average Collection Period = Average AR/ Avg Sales per Day

Question 17

Performance Measures and Management Techniques

Define Average A/R Balance

Answer 17

Performance Measures and Management Techniques

Average A/R Balance = (Credit Sales per Day) x (Average Collection Period)

Question 18

Performance Measures and Management Techniques

Define Asset Turnover

Answer 18

Performance Measures and Management Techniques

Asset Turnover = Sales/ Total Assets

Question 19

Performance Measures and Management Techniques

Define Times Interest Earned

Answer 19

Performance Measures and Management Techniques

Times Interest Earned = EBIT/ Interest Expense

Question 20

Performance Measures and Management Techniques

Define Interest rate spread (%)

Answer 20

Performance Measures and Management Techniques

Spread (%) = ROI - Cost of Capital

Interest rate spread is the difference between the return on investment and the required rate of return (cost of capital)

Question 21

Performance Measures and Management Techniques

Define Return on Investment

Answer 21

Performance Measures and Management Techniques

ROI = Operating Profit / Investment

Question 22

Performance Measures and Management Techniques

Define Return on Investment

Answer 22

Performance Measures and Management Techniques

ROI = (Sales/ Investment) x (Net Income/ Sales)

SINUS

ROI = Asset Turnover x Profit Margin

Question 23

Performance Measures and Management Techniques

Define Return on Equity

Answer 23

Performance Measures and Management Techniques

Return on Equity = Net Income/ Amount Equity Invested

Question 24

Performance Measures and Management Techniques

Define Return on Investment (Du Pont)

Answer 24

Performance Measures and Management Techniques

ROI = NI / Total Assets
= (NI/ Sales) x (Sales/ Avg Investment)
= Return on Sales x Asset Turnover Ratio

Question 25

Performance Measures and Management Techniques

Define Throughput contribution per unit

Answer 25

Performance Measures and Management Techniques

Throughput contribution per unit =
Unit Revenue- Unit Direct Materials

Question 26

Performance Measures and Management Techniques

What are the requirements when designing a Performance Management System?

Answer 26

Performance Measures and Management Techniques

Requirements when designing a Performance Management System

1. Requires an understanding on how system will be used (compensation, resource allocation, business unit performance)
2. Should reflect strategy of company
3. Should be strategic ( communicate org goals, motivate management)
4. Represent economic reality (clear and accurate measure)
5. Should be sensitive to factors within manager’s control