Chapter 12 Testbank Af201 Chapter 12 Quiz Test Bank

lOMoARcPSD|9693341
Chapter 12 Testbank Key
(p. 558)
1. When managers within the various subunits of an organisation are committed to achieving the goals
set by top management, the result is:
A. Goal
congruence
B. planning and
control
C. responsibility
accounting
D. delegation of decision
making
2. Responsibility accounting:
(p. 559)
A. fosters goal
congruence
B. involves using the various concepts and tools used by management accountants for planning
and control
C. is used to measure the performance of
subunits
D. All of the given
answers
3. The biggest challenge in making a decentralised organisation function effectively is:

(p. 558)
A. to earn maximum profits through fair

practices
B. to minimise organisational
losses
C. taking advantage of the specialised knowledge and skills of a
manager
D. obtaining goal congruence among the organisation's autonomous
managers
lOMoARcPSD|9693341
4. Which of the following is not a benefit of decentralisation?

(p. 558)
A. Specialised information about the local

markets
B. Motivati
on
C. Relief to upper-level
management
D. Narrow focus on the manager's own
subunit
(p. 558)
5. Delegating decision making to lower-level managers, thereby enabling an organisation to react
quickly to opportunities and problems as they arise, is a characteristic of:
A. a decentralised
organisation
B. a centralised
organisation
C. a
corporation
D. responsibility
accounting
6. What is a negative consequence of decentralisation?

(p. 558)
A. Narrow
focus
B. Services may be
duplicated
C. Suboptimal decisions may be
made
D. All of the given
answers
lOMoARcPSD|9693341
7. Which of the following statements is/are false?

(p. 558)
A. Goal congruence is difficult to achieve because managers are often unaware of the effects of their
decisions on the organisation's subunits.
B. The development of performance measures to evaluate a subunit and its managers will help achieve
goal congruence.
C. People are naturally concerned with the performance of all subunits within the
organisation.
D. Goal congruence can be achieved by having a reward system tied to a manager's
performance.
8. Which of the following is not an example of a responsibility centre?

(p. 559)
A. Corporate
centre
B. Revenue
centre
C. Profit
centre
D. Investment
centre
9. Which of the following managers is held responsible for only the costs incurred in the subunit?
(p. 559)
A. Cost centre
manager
B. Revenue centre
manager
C. Profit centre
manager
D. Investment centre
manager
lOMoARcPSD|9693341
10. Which of the following managers is held accountable for the subunit's profit and invested capital?
(p. 559)
A. Investment centre
manager
B. Revenue centre
manager
C. Profit centre
manager
D. Sales
manager
11. Which of the following managers is held accountable for only the revenue attributed to a subunit?
(p. 559)
A. Cost centre
manager
B. Revenue centre
manager
C. Sales
manager
D. Investment centre
manager
12. Which of the following managers is held accountable for the profit of the subunit?
(p. 559)
A. Revenue centre
manager
B. Profit centre
manager
C. Investment centre
manager
D. Both B and
C
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13. A sales department manager is an example of a:

(p. 559)
A. cost centre
manager
B. revenue centre
manager
C. profit centre
manager
D. investment centre
manager
14. An example of a profit centre is the:

(p. 559)
A. painting
department
B. sales
department
C. company-owned restaurant in a fast-food
chain
D. All of the given
answers
Difficulty: Medium
Graduate Attribute: Problem Solving
Learning Objective: 12-02 Define and provide examples of responsibility centres: cost centres, revenue centres, profit centres and investment
centres
(p. 571)
15. The amount charged when one business unit sells goods or services to another business unit is
called a(n):
A. opportunity
cost
B. transfer
price
C. standard variable
cost
D. residual
price
Learning Objective: 12-08 Understand why organisations have transfer pricing systems
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16. An opportunity cost can best be described as the:
(p. 573)
A. pricing of goods as per market

trends
B. direct expenses incurred in producing
goods
C. total difference in cost of production between two
divisions
D. the benefit that is foregone for one alternative in order to pursue another
alternative
17. Fragrance Pty Ltd has two divisions: the Cologne Division and the Bottle Division. The company is
(p. 573)
decentralised and each division is evaluated as a profit centre. The Bottle Division produces bottles that can be
used by the Cologne Division. The Bottle Division's variable manufacturing cost per unit is $2.00 and shipping
costs are $0.10 per unit. The Bottle Division's external sales price is $3.00 per unit. No shipping costs are
incurred on sales to the Cologne Division. The Cologne Division can purchase similar bottles in the external
market for $2.50.
The Bottle Division has sufficient capacity to meet all external market demands in addition to meeting the
demands of the Cologne Division. Using the general rule, the minimum transfer price from the Bottle Division to
the Cologne Division would be:
A. $2.0
0
B. $2.1
0
C. $2.5
0
D. $2.9
0
lOMoARcPSD|9693341
(p. 573)
market for $2.50.
Assume the Bottle Division has no excess capacity and can sell everything produced externally. Using the
general rule, the transfer price from the Bottle Division to the Cologne Division would be:
A. $2.1
0
B. $2.5
0
C. $2.9
0
D. $3.0
0
(p. 573)
market for $2.50.
Assume the Bottle Division has no excess capacity and can sell everything produced externally. What is the
maximum amount Cologne Division would be willing to pay for the bottles?
A. $2.0
0
B. $2.1
0
C. $2.5
0
D. $2.9
0
AACSB: Analytical
Difficulty: Medium
Learning Objective: 12-11 Determine appropriate transfer prices under a variety of scenarios
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20. Which of the following statements about transfer prices is/are true?
(p. 573)
i. When the producing division has excess capacity and the external market is imperfectly competitive,
the general transfer-pricing rule and the external market price will be the same.
ii. If the transfer price is set at the market price, the supplying division will be indifferent to selling internally or
externally.
iii. If the transfer price is set at the market price, the buying division will usually purchase goods from inside
its organisation, if product specifications are met.
A. i and
ii
B. ii and
iii
C. i and
iii
D. All of the given
answers
Difficulty: Medium
(p. 573)
21. Which of the following statements about the general transfer-pricing rule is/are true?
i. When the producing division has excess capacity, the transfer decision should be based on the outlay cost.
ii. When the producing division has no excess capacity, the opportunity cost is the foregone contribution
from the lost sale.
iii. If the producing division has excess capacity or the external market is imperfectly competitive, the general
rule and the external market price will not yield the same transfer price.
A. i
B. i
i
C. ii and
iii
D. All of the given
answers
Difficulty: Medium
lOMoARcPSD|9693341
22. Which of the following statements is false, with respect to a negotiated transfer price?
(p. 572)
A. The profit of each division will depend on the negotiating skills of the
managers.
B. The process always results in a spirit of cooperation and unity that is desirable throughout an
organisation.
C. The market price is usually the base line for
negotiations.
D. Negotiations can lead to divisiveness and competition between participating business unit
managers.

Learning Objective: 12-09 Explain the various methods that can be used to determine transfer prices
23. Transfer prices should not be based on actual costs because:

(p. 572)
A. inefficient producing divisions have higher costs of production, which would be passed on by buying
divisions.
B. producing divisions have no incentives to
control costs.
C. inefficient units with high costs of production have no
opportunity for profit.
D. inefficient producing divisions have higher costs of production, which would be passed on by buying
divisions AND producing divisions have no incentives to control costs.

24. Which of the following statements about cost-based transfer prices is/are true?
(p. 572)
i. A transfer price set at standard variable cost plus a mark-up provides an incentive for the supplying
business to make the transfer.
ii. Absorption cost-based transfer prices are good for the company as a whole because all costs are considered.
iii. Transfer prices should be based on standard costs rather than actual costs since the cost of inefficiency
should not be passed on.
A. i and
ii
B. ii and
iii
C. i and
iii
D. All of the given
answers
Difficulty: Medium
lOMoARcPSD|9693341
25. Transfer prices should not be based on absorption costs as this could result in suboptimal decisions
(p. 572)
by the:
A. personnel
division.
B. competitive
market.
C. buying
division.
D. selling
division.
26. Which of the following is usually achieved when the general transfer-pricing rule is implemented?
(p. 573)
A. Harmon
y
B. Perfect
competition
C. Goal
congruence
D. Cost
measurement
(p. 573)
27. Which of the following statements is/are true?
When a multinational company transfers goods or services between business units located in different
countries:
i. the tax rates of the different countries will have no effect on overall company profits.
ii. the result is a moving of profits from one country to another.
iii. the company will consider the tax rates of the different countries when determining the transfer price.
A. i
B. i
i
C. i and
ii
D. ii and
iii
lOMoARcPSD|9693341
28. Barrister Company has two divisions: A and Z. The A Division produces a single product that can be
(p. 573)
sold to outside customers or to the Z Division. Sales forecasts, production statistics and costs for both
divisions for 2008 are shown below:
A Division:
Z Division:
* When A Division sells to Z Division, no variable selling costs are incurred by A Division. Calculate the
minimum per unit transfer price that A Division should charge Z Division in 2008,
using the general transfer-pricing formula.
A. $6.0
0
B. $8.5
0
C. $7.2
6
D. None of the given
answers
AACSB: Analytical
Difficulty: Difficult
lOMoARcPSD|9693341
29. Polly Woodside Maritime Division purchases from an outside supplier for $52 per unit. The
(p. 573)
company's Shore Division, which has excess capacity, makes and sells the same part for external customers at
a variable cost of $38 and a selling price of $58. If Shore Division commences sales to Maritime Division it will (1)
use the general rule and (2) be able to reduce the variable cost on internal transfers by $4. If external sales are
not affected, Shore Division should establish a transfer price of:
A. $3
4
B. $3
8
C. $5
8
answers
AACSB: Analytical

30. Symonds Bendigo Division purchases from an outside supplier for $52 per unit. The company's
(p. 573)
Ballarat Division, which has no excess capacity, makes and sells the same part for external customers at a
variable cost of $38 and a selling price of $58. If Ballarat commences sales to Bendigo it will (1) use the
general rule and (2) be able to reduce the variable cost on internal transfers by $4. If external sales are
not affected, Ballarat should establish a transfer price of:
A. $3
4
B. $3
8
C. $5
4
D. $5
8
AACSB: Analytical

lOMoARcPSD|9693341
31. Corporate policy at Weber Pty Ltd requires that all transfers between divisions be recorded at
(p. 573)
variable cost as a transfer price. Divisional managers have complete autonomy in choosing their sources of
customers and suppliers. The Milling Division sells a product called RK2. Forty per cent of the sales of RK2 are to
the Products Division, while the remainder of the sales are to outside customers. The manager of the Milling
Division is evaluating a special offer from an outside customer for 10 000 units of RK2 at a per unit price of $15. If
the special offer were accepted, the Milling Division would be unable to supply those units to the Products
Division. The Products Division could purchase those units from another supplier for $17 per unit. Annual
capacity for the Milling Division is 25 000 units. The 2008 budget information for the Milling Division, based on full
capacity, is presented below.
Assuming the Milling Division manager agrees to the special offer, what is the effect of the decision on
the gross margin of Weber as a whole?
A. $20 000
decrease
B. $50 000
decrease
C. $30 000
increase
D. $50 000
increase
AACSB: Analytical
Difficulty: Medium
lOMoARcPSD|9693341
(p. 573)
Assume the company permits the division managers to negotiate a transfer price. The managers agree to a
$15 transfer price adjusted to share equally the additional gross margin to Milling Division resulting from the
sale to the Products Division. What is the agreed transfer price?
A. $14.0
0
B. $13.5
0
C. $12.5
0
D. $10.5
0
AACSB: Analytical
Difficulty: Medium
lOMoARcPSD|9693341
(p. 573)
Division is evaluating a special offer from an outside customer for 10 000 units of RK2 at a per unit price of
$15.00. If the special offer were accepted, the Milling Division would be unable to supply those units to the
Products Division. The Products Division could purchase those units from another supplier for $17 per unit.
Annual capacity for the Milling Division is 25 000 units. The 2008 budget information for the Milling Division,
based on full capacity, is presented below.
Assume that demand increases for the Milling Division. All 25 000 units can be sold at the regular price to
outside customers and the Product Division's annual demand declines to 5 000 units. What transfer price would
be calculated under the general transfer-pricing formula?
A. $18.0
0
B. $17.0
0
C. $16.0
0
D. $10.0
0
AACSB: Analytical

lOMoARcPSD|9693341
(p. 573)
Assume that demand increases for the Milling Division. 20 000 units can be sold at the regular price to
outside customers and the Products Division's annual demand remains at 10 000 units. What is the transfer
price that would be calculated under the general transfer-pricing formula?
A. $12.0
0
B. $14.0
0
C. $16.0
0
D. $18.0
0
AACSB: Analytical
Difficulty: Medium
lOMoARcPSD|9693341
35. Nova Company has two divisions: OPA Division and LPA Division. The OPA Division manufactures a
(p. 573)
single product, presently operates at 95 per cent of full capacity (100 000 units) and can sell all 95 000 units
produced to outside customers. This product is also a component used in a product made by the LPA Division.
OPA's full cost of production is $22.50 per unit, including $4.50 of applied fixed overhead costs. The applied
fixed overhead is calculated based on production of 95 000 units.
OPA's management believes that production can be raised to 100 000 units without affecting cost behaviour.
OPA's selling price per unit is $30 with a 10 per cent sales commission on outside sales. LPA is presently
negotiating the purchase of units from OPA. LPA can purchase a comparable component outside for $29.
Using the general transfer-pricing formula, calculate a transfer price for 5000 units that would be in the best
interests of the company as a whole.
A. $18.0
0
B. $22.5
0
C. $27.8
0
D. $29.0
0
AACSB: Analytical
Difficulty: Medium
36. Nova Company has two divisions: OPA Division and LPA Division. The OPA Division manufactures a
(p. 573)
single product, presently operates at 95 per cent of full capacity (100 000 units) and can sell all 95 000 units
produced to outside customers. This product is also a component used in a product made by the LPA Division.
OPA's full cost of production is $22.50 per unit, including $4.50 of applied fixed overhead costs. The applied
fixed overhead is calculated based upon production of 95 000 units.
OPA's management believes that production can be raised to 100 000 units without affecting cost behaviour.
OPA's selling price per unit is $30 with a 10 per cent sales commission on outside sales. LPA is presently
negotiating the purchase of units from OPA. LPA can purchase a comparable component outside for $29.
What is the minimum acceptable transfer price for the first 5000 units from the viewpoint of OPA's
management?
A. $18.0
0
B. $22.0
0
C. $27.0
0
D. $27.8
0
AACSB: Analytical
Difficulty: Medium
lOMoARcPSD|9693341
37. Division A transfers a profitable subassembly to Division B, where it is assembled into a final
(p. 573)
product. Division A is located in New Zealand, which has a high tax rate. Division B is located in Thailand, which
has a low tax rate. Ideally, (1) which type of before tax income should each division report from the transfer and
(2) what type of transfer price should be set for the subassembly?
Division A Division B Division C

Income Income Price
A. low low low

B. low high low
C. low high high
D. high low high
Difficulty: Medium
38. Which of the following statements about transfer pricing is/are true?
i. Income taxes and import duties are an important consideration when setting a transfer price for international
companies.
ii. Transfer prices cannot be used by organisations in a service industry.
iii. Transfer prices are totally cost based and not market based.
A. i
B. i
i
C. i and
ii
D. All of the given
answers
(p. 573)
39. Hamilton has no excess capacity. If the company wishes to implement the general transfer-pricing rule,
the opportunity cost would be equal to:
A. zer
o
B. the direct expenses incurred in producing the
goods
C. the total difference in the cost of production between two
divisions
D. the contribution foregone from the lost
external sale
lOMoARcPSD|9693341
(p. 573)
40. Hamilton has excess capacity. If the company wishes to implement the general transfer-pricing rule,
the opportunity cost would be equal to:
A. zer
o
B. the direct expenses incurred in producing the
goods
C. the total difference in the cost of production between two
divisions
D. the sum of the variable cost plus the fixed
cost

41. Business unit profit and loss statements show:

(p. 566)
A. profits for the major responsibility centres and for the organisation as a
whole
B. profits by quarter for the organisation as a
whole
C. comparative profits by year for the organisation as a
whole
D. All of the given
answers
Learning Objective: 12-04 Prepare profit reports that highlight the financial performance of a range of business units
42. A common cost is:

(p. 567)
A. not easily related to any business unit's

activities
B. avoidabl
e
C. employees'
wages
D. direct
labour
Learning Objective: 12-06 Complete financial performance reports for responsibility centres taking into account allocated costs, common costs
and variances
lOMoARcPSD|9693341
43. One advantage of business unit reports is that they make a distinction between business units
(p. 566)
and:
A. business unit
managers
B. budget
s
C. allocated
costs
D. cost
objects
Learning Objective: 12-05 Explain the potential differences in information provided to evaluate the performance of responsibility centres and of
managers
(p. 566)
44. Which of the following statements about business unit reporting is/are true?
i. Business unit reports distinguish between costs that are controllable by the business unit manager
and costs that are beyond the influence of the business unit manager.
ii. These statements must be presented in an absorption-costing format.
iii. Business unit reporting shows profit and loss statements for the company as a whole and for its major
business units.
A. i and
ii
B. All of the given
answers
C. i and
iii
D. ii and
iii
managers
45. Business unit reporting shows profit and loss statements for the company as a whole and for:
(p. 566)
A. its major business

units
B. controllable
expenses
C. uncontrollable
expenses
D. the contribution
margin
managers
lOMoARcPSD|9693341
(p. 566)
46. The following information was taken from the business united profit and loss statement of Resell Real
Estate Agents for 2008:
In addition, the company incurred common fixed costs of $18 000. What was the business unit margin of
the Tamworth Division during 2008?
A. ($800
0)
B. $400
0
C. $10
000
D. $30
000
AACSB: Analytical
Difficulty: Medium
managers
lOMoARcPSD|9693341
(p. 566)
47. The following information was taken from the business united profit and loss statement of Resell Real
Estate Agents for 2008:
In addition, the company incurred common fixed costs of $18 000. Which amount should be used to evaluate
the Sydney Division as an investment of the company?
A. $25
000
B. $10
000
C. $400
0
D. ($800
0)
AACSB: Analytical
Difficulty: Medium
managers
lOMoARcPSD|9693341
48. Callahan Company consists of two divisions, Northern and Southern. During 2008, many of the
(p. 566)
accounting records were destroyed in a fire. The managing director has asked the accountant for information
relating to 2008. The following information is available to the accountant.
In addition, the contribution margin ratio for both divisions was the same. What were the common fixed costs
(z) during 2008?
A. $130
000
B. $45
000
C. $70
000
D. $65
000
AACSB: Analytical
Difficulty: Medium
managers
lOMoARcPSD|9693341
49. The budgeted and actual amount of a responsibility centre's key financial results are shown on a:
(p. 566)
A. responsibility
report
B. variance
report
C. variable cost
report
D. performance
report
50. The data in a performance report helps managers to:

(p. 566)
A. consider ways of improving their

performance
B. use their
computers
C. make personnel
changes
D. eliminate
spending
(p. 561)
51. Which of the following are characteristics of shared service units? i.
Head office dominates
ii. Usually structured as a cost centre
iii. Services tend to be standardised
A. i and
ii
B. i and
iii
C. ii and
iii
answers
Difficulty: Medium
Learning Objective: 12-03 Understand how shared services operations and teams can enhance competitiveness
lOMoARcPSD|9693341
(p. 561)
52. Which of the following are benefits of self-managed work teams? i.
Improved customer service
ii. Increased goal congruence among team members
iii. Increased control by top management over outcomes
A. i and
ii
B. i and
iii
C. ii and
iii
answers
(p. 561)
53. Which of the following are risks associated with self-managed work teams? i.
Deterioration in job satisfaction of team members
ii. Less opportunity to improve the quality of service
iii. Slower response time to customer needs
A. i and
ii
B. i and
iii
C. ii and
iii
answers
(p. 570)
54. Which of the following are characteristics of flash reports? i.
Provided daily
ii. Include both financial and non-financial information
iii. Comprehensive and cover the full range of performance criteria
A. i and
ii
B. i and
iii
C. ii and
iii
D. All of the given
answers
Learning Objective: 12-07 Understand how real-time reporting can enhance management decision making
lOMoARcPSD|9693341
55. Which of the following might you expect to see being used as a performance measure for a profit
(p. 559)
centre?
A. Return on
investment
B. Actual business unit profit compared with budget business unit
profit
C. Standard cost
variances
D. Both return on investment AND standard cost
variances
centres
(p. 559)
56. Which of the following might you expect to see being used as a performance measure for an
investment centre?
A. Return on
investment
profit
C. Actual business unit revenue compared with budget business unit
revenue
D. Both return on investment AND actual business unit revenue compared with budget business unit
revenue
centres
57. Which of the following might you expect to see being used as a performance measure for a cost
(p. 559)
centre?
A. Return on
investment
profit
C. Standard cost
variances
D. All of the given
answers
centres
lOMoARcPSD|9693341
(p. 559)
58. Which of the following might you expect to see being used as a performance measure for a
revenue centre?
A. Actual business unit profit compared with budget business unit

profit
B. Standard cost
variances
C. Actual business unit revenue compared with budget business unit
revenue
D. Both standard cost variances AND actual business unit revenue compared with budget business unit
revenue
centres
59. Which of the following statements unambiguously describes the term ‘contribution margin'?
(p. 566)
A. Contribution of the business unit towards the

company's profits
B. Revenue minus the total manufacturing costs of the
business unit
C. Revenue minus all variable costs of the
business unit
D. Revenue minus all of the business unit's costs, whether fixed or
variable
(p. 566)
60. Which of the following statements best completes this sentence? ‘A cost is deemed to be
controllable by the manager …'
A. who has staff authority over

that cost
B. who has line authority over
that cost
C. who is next in line to the financial controller of the
firm
D. who is in the best position to influence that cost in some
way
managers
lOMoARcPSD|9693341
(p. 558)
61. Which of the following statements best completes this sentence? ‘The biggest challenge(s) facing all
decentralised firms is …'
A. to reap the advantages of

autonomy
B. to attempt to ensure goal
congruence
C. to choose the most appropriate
transfer price
D. to reap the advantages of autonomy AND to attempt to ensure goal
congruence
62. Which of the following is a benefit of decentralisation?

(p. 558)
A. Increased motivation of
management
B. Goal
congruence
C. Focus on the firm as a
whole
D. Suboptimal decision
making
63. In a divisional corporate organisation, an ideal inter-divisional transfer price should:

(p. 571)
A. maximise the profits of the selling

division
B. maximise the profits of the
corporation
C. ensure goal congruence, divisional autonomy and
motivation
D. All of the given
answers
lOMoARcPSD|9693341
64. What is the general rule for setting a transfer price?

(p. 573)
A. Additional costs of the supplying division + opportunity cost to the buying

division
B. Additional costs of the supplying division + opportunity cost to the supplying
division
C. Additional costs of the buying division + opportunity cost to the
supplying division
D. Always set at full-cost-plus
price
Learning Objective: 12-10 Explain the general rule that can be used to set transfer prices
65. Which of the following is a problem with the use of a negotiated transfer price?
(p. 572)
A. The negotiations can be extremely time-

consuming.
B. The final transfer price may be primarily due to an individual's superior
negotiation skills.
C. It can lead to suboptimal decisions for the
firm.
D. All of the given
answers
66. Which of the following is a problem with the use of cost-based transfer pricing?
(p. 572)
A. It does not lead to optimal decisions for the

firm.
B. There are many definitions of cost-based transfer
pricing.
C. There are potential goal-congruence
problems.
D. It does not lead to optimal decisions for the firm AND there are potential goal-
congruence problems.
lOMoARcPSD|9693341
67. Which of the following is a key problem with the use of market-based transfer prices?
(p. 572)
A. It does not take into account the saving in cost (e.g. selling expenses, collection expenses) because of
transferring internally.
B. It leads to decision making that is suboptimal for the
firm.
C. It does not promote divisional
autonomy.
D. It does not show the contribution of each division to overall
profit.
(p. 572)
68. When the transfer price chosen by management charges another department the price that would be
charged to outside customers, this type of transfer pricing is called:
A. marginal cost transfer

pricing
B. cost-based transfer
pricing
C. market-based transfer
pricing
D. negotiated transfer
pricing
(p. 561)
69. The difference between establishing a shared service unit and centralisation shared services include:
i. centralised services are located at corporate headquarters; shared services are located close to internal
customers
ii centralised services are more efficient than shared services
iii centralised services are evaluated based on service adherence to service level agreements; shared
services are evaluated based on budgets and corporate objectives
A. i and
ii
B. ii
i
C. i
D. i and
iii
lOMoARcPSD|9693341
(p. 572)
70. Which of the following information should be taken into account when using a negotiated transfer price
method to determine transfer price?
i. external market price
ii savings in selling and distribution costs when transferring internally
iii excess capacity in the selling division
iv excess capacity in the buying division
A. ii and
iii
B. i, ii and
iii
C. ii, iii and
iv
D. i, ii, iii and
iv
Difficulty: Medium
(p. 567)
71. When management is using performance reports to evaluate the economic performance of a
business unit, which of the following costs should be considered:
A. Any costs that are attributable to the

business unit
B. Costs that are both attributable to the business unit AND are controllable by the business unit
manager
C. Common costs and any costs that are attributable to the
business unit
D. Only costs controllable by the business unit
manager
and variances
(p. 567)
72. When management is using performance reports to evaluate the performance of a business unit
manager, which of the following costs should be considered:
A. Any costs that are attributable to the

business unit
B. Common costs and any costs that are attributable to the
business unit
C. Costs controllable by the business unit manager, common costs, and any costs that are attributable
to the business unit
D. Only costs controllable by the business unit
manager
and variances
lOMoARcPSD|9693341
73. Fruities Ltd has two divisions, Durian Division and Juice Division. Durian Division has an annual
(p. 573)
capacity of 10 000 units of durian juice concentrate. Juice Division's annual requirement of durian juice
concentrate is 8000 units. Fruities Ltd requires that divisions should purchase inputs internally where available
and uses a cost-plus transfer price policy, where transfer price is set at variable cost plus 25 per cent. Therefore,
Durian Division always satisfies the demand of the Juice Division first, before selling the remaining durian
concentrate to external suppliers at the market price of $10 per unit. The variable cost of one unit of durian juice
concentrate at Durian Division is $6. What is the difference in Durian Division's profit under the cost-plus transfer
price policy and a market-price transfer price policy?
A. Fruities Ltd’s profit is $20 000 lower under the cost-plus transfer pricing
approach
B. Fruities Ltd’s profit is $20 000 higher under the cost-plus transfer pricing
approach
C. Fruites Ltd’s profit is $25 000 higher under the cost-plus transfer pricing
approach
D. There is no difference under the two
policies.
AACSB: Analytical
Difficulty: Medium
(p. 573)
concentrate is 8000 units. Fruities Ltd requires that divisions should purchase inputs internally where available,
and uses a cost-plus transfer price policy, where transfer price is set at variable cost plus 25 per cent. Therefore,
Durian Division always satisfies the demand of the Juice Division first, before selling the remaining durian
concentrate to external suppliers at the market price of $10 per unit. The variable cost of one unit of durian juice
concentrate at Durian Division is $6. The external demand for Durian Division's durian juice concentrate is 2000
units.
What is the difference in the overall profit of Fruities Ltd under the cost-plus transfer price policy and a
market-price transfer price policy?
A. Fruities Ltd's profit is $20 000 lower under the cost-plus transfer pricing
approach
B. Fruities Ltd's profit is $20 000 higher under the cost-plus transfer pricing
approach
C. Fruites Ltd's profit is $25 000 higher under the cost-plus transfer pricing
approach
D. There is no difference under the two
policies.
AACSB: Analytical
Difficulty: Medium
lOMoARcPSD|9693341
(p. 573)
concentrate is 8000 units. The variable production cost of one unit of durian juice concentrate at Durian Division
is $6, but the division incurs $1 additional shipping cost per unit when selling to external suppliers. The market
price for the division's durian juice concentrate is $10 per unit, and currently, the external demand for Durian
Division's durian juice concentrate is 5000 units. Using the transfer pricing formula, Durian Division should
charge the Juice Division:
A. $6.0
0
B. $7.1
3
C. $9.0
0
D. $10.0
0
AACSB: Analytical
Difficulty: Medium
(p. 573)
concentrate is 8000 units. There is no external market for durian juice concentrate; however, the Durian Division
can use its facilities to manufacturer prune paste, which is a very popular product with unlimited external
demand, at $13 per unit. The variable production cost of one unit of durian juice concentrate at Durian Division is
$6, and the variable production cost of one unit of prune paste is $8. Durian division also incurs $1 additional
shipping cost per unit when selling prune paste to external suppliers.
Using the transfer pricing formula, what is the per unit opportunity cost of selling one unit of durian juice
concentrate to Juice Division?
A. $
0
B. $
4
C. $
5
D. $1
2
AACSB: Analytical
Difficulty: Medium
lOMoARcPSD|9693341
(p. 573)
capacity of 10 000 units of either juice concentrate or fruit paste. Usually, Durian Division produces durian juice
concentrate for the Juice Division. Juice Division's annual requirement of durian juice concentrate is 8000 units.
There is no external market for durian juice concentrate; however, the Durian Division can use its facilities to
manufacturer prune paste, which is a very popular product with unlimited external demand. The market price for
prune paste is $13 per unit. The variable production cost of one unit of durian juice concentrate at Durian
Division is $6, and the variable production cost of one unit of prune paste is $8. Durian division also incurs $1
additional shipping cost per unit when selling prune paste to external suppliers.
Using the transfer pricing formula, what is the per unit transfer price selling one unit of durian juice concentrate
to Juice Division?
A. $
6
B. $
8
C. $1
0
D. $1
1
AACSB: Analytical
Difficulty: Difficult
78. A strategic business unit is:

(p. 559)
A. A cost
centre
B. Either a revenue centre or a profit
centre
C. Either a revenue centre or an investment
centre.
D. Either a profit centre or an investment
centre.
centres
79. Performance reports

(p. 567)
The performance reports generated by a responsibility accounting system form a hierarchy of ‘performance
reports’. Explain what is meant by this term.
AACSB: Communication
Graduate Attribute: Communication

and variances
lOMoARcPSD|9693341
(p. 559)
80. If a manager were responsible for a division's performance and activities, the division would have to be
classified as a cost centre.
FALSE
centres
(p. 561)
81. Although shared service units are generally established as profit centres it is often acceptable if a zero
profit is achieved.
TRUE
Difficulty: Medium
(p. 566)
82. When a contribution margin format is used for reporting, expenses are grouped according to the
functions (e.g. sales and distribution, financial) carried out by the organisation.
FALSE
83. Transfer pricing is a system established internally to facilitate units being set up as profit centres.
(p. 571)
TRUE
(p. 579)
84. Service level agreements are used within organisations to establish which services are to be
provided and set the transfer price for these services.
TRUE
Learning Objective: 12-12 Understand the nature of service level agreements
85. When using cost-based transfer prices, actual costs should be used in preference to standard
costs.
(p. 572)
FALSE
(p. 567)
86. The costs arising from activities that benefit two or more units are generally referred to as
controllable costs.
FALSE
Learning Objective: 12-06 Complete financial performance reports for responsibility centres taking into account allocated costs,
lOMoARcPSD|9693341
common costs and variances
87. When organisational structures move to a flatter structure, it is anticipated that the levels of
(p. 561)
management are reduced which in turn allows the organisation to react quicker to potential
opportunities.
TRUE
(p. 559)
88. When responsibility centres are established as revenue centres, one way of measuring
performance in these centres is to evaluate the return on investment.
FALSE
centres
(p. 558)
89. When a company manager's behaviour is aimed at achieving the goals of an organisation, the
company can be confident of goal congruence.
TRUE
E. The return on investment can be defined as:

A. capital invested divided by total sales.
B. total sales divided by capital invested.
C. profit divided by capital invested.
D. profit divided by total sales.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.01 Calculate an investment centre's return on investment (ROI)
5. Calculate the return on investment of new equipment in the first year

if: profit = $3 000 000
invested capital = $45 000 000
increase in divisional profits = $45 000
purchase of new machine = $900 000
A. 5%
B. 6.66%
C. 1.5%
D. None of the given answers
AACSB: Analytical
Difficulty: Easy
E. The asset turnover of an organisation can be calculated as:

A. the amount of sales revenue divided by total invested capital.
B. total invested capital divided by sales revenue.
C. total sales revenue divided by profit.
D. profit divided by sales margin.
AACSB: Reflective
Difficulty: Easy
6. Bricker Fabrics reported a profit margin during the year of 20 per cent and an investment turnover of 40 per cent. What
was its return on investment for the year?
A. 50%
B. 20%
C. 8%
D. 2%
AACSB: Analytical
Difficulty: Easy
7. Joy Home Fashions reported a return on investment during the year of 6 per cent and a profit margin of 12 per
cent. What was the investment turnover for the year?
A. 18%
B. 50%
C. 72%
D. 20%
AACSB: Analytical
Difficulty: Easy
E. For Mildura Ltd, if the sales are $1 500 000, the invested capital $450 000 and the profit $90 000, what is the
asset turnover for the year?
A. 20%
B. 5% C.
30% D.
333%
AACSB: Analytical
Difficulty: Easy
8. The following information pertains to Bingo Concrete for the year 2008:
Sales are $1 500 000
Gross margin is $600 000
Profit is $90 000
What is the profit margin for the
year? A. 40%
B. 30%
C. 20%
D. 6%
AACSB: Analytical
Difficulty: Easy
E. For Echuca Ltd sales are $1 500 000, profit is $90 000, invested capital is $450 000 and the interest rate is 8 per
cent. What is the residual income for the year?
A. ($30 000)
B. $54 000
C. $82 800
D. $36 000
AACSB: Analytical
Difficulty: Easy
Learning Objective: 13.04 Calculate residual income (RI) for an investment centre, and describe some advantages and disadvantages of using RI
to evaluate performance
9. Holt Company Ltd determined residual income for the year of $22 000. The company's cost of capital was 12 per
cent, the investment turnover was 2.0, and capital invested was $400 000. What was Holt Company's profit during the
year? A. $26 000
B. $48 000
C. $74 000
D. $70 000
AACSB: Analytical
Difficulty: Medium
E. Fine Furnishings Pty Ltd earned residual income of $40 000 during the year. The net profit was $160 000 during
the year and the cost of capital was 12 per cent. What was the return on investment for the year?
A. 9%
B. 12%
C. 16%
D. Insufficient information to determine
AACSB: Analytical
Difficulty: Medium
10. Precious Metals Pty Ltd earned residual income of $70 000 during the year. The net profit was $250 000 during the
year and the required return was 15 per cent. What was the invested capital?
A. $1 200 000
B. $1 500 000
C. $1 400 000
D. $1 300 000
AACSB: Analytical
Difficulty: Easy
12.
Calculate the asset turnover from the following data:
E. 0.07
F. 0.67
G. 0.53
H. 0.05
AACSB: Analytical
Difficulty: Easy
13. One of the disadvantages of return on investment is that:

A. it focuses on profit only and disregards the cost of the assets.
B. it may discourage managers from investing in profitable projects.
C. it does not enable comparison of investment centres of different sizes.
11. it focuses only on long-term performance.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.02 Describe some advantages and limitations of ROI as a measure of performance of investment centres
E. The advantage of residual income as a measure of investment centre performance

is: A. it can be used to compare investment centres of different sizes.
B. it focuses on long-term performance.
C. it includes the organisation's minimum required rate of return.
D. it can be used to compare investment centres of different sizes AND it includes the organisation's minimum required
rate of return.
AACSB: Reflective
Difficulty: Easy
12. Which of the following gives a more accurate calculation of return on investment and residual income?
A. Total capital invested
B. Total assets
C. Average invested capital
D. Average cost of capital
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.05 Recognise the reasons for the various definitions of profit and invested capital that can be used in the calculation of return
on investment and residual income
16. Net book value produces a misleading increase in return on investment because:
A. investment centres with old assets will show a higher return on investment than centres with new assets.
B. investment centres with old assets will show a lower return on investment than investment centres with new assets.
C. investment centres with old assets will show an equal return on investment centres with new assets.
D. book value reflects changing market values.
AACSB: Reflective
Difficulty: Medium
17. One of the advantages of using net book value to measure invested capital is that:
A. it maintains consistency with the balance sheet prepared for external reporting purposes.
B. it allows comparison of return on investment with different companies.
C. the return on investment will increase steadily over time.
D. it maintains consistency with the balance sheet prepared for external reporting purposes AND it allows comparison
of return on investment with different companies.
AACSB: Reflective
Difficulty: Easy
E. Managers' performance in an investment centre can best be evaluated by:

A. the total revenue under their control.
B. the total capital invested in the organisation and the sizeable amount of return.
C. the profit earned during a period less all revenues.
D. those revenues, costs and investments that they can control.
AACSB: Reflective
Difficulty: Easy
19.
Which of the following statements is false?
A. Tying rewards to a profit-based measure can provide an incentive for managers to manipulate accounting results.
B. Pay systems can be used at all levels of the organisation.
13. Pay systems focus on long-term results.
D.
A pay system can include both cash and non-cash rewards.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.11 Identify the different forms of performance-related pay systems used in organisations
E. Which of the following is an example of an intrinsic reward?
A. Cash bonus
B. Personal satisfaction
C. Larger office
D. Certificate of merit
AACSB: Reflective
Difficulty: Medium
Learning Objective: 13.09 Recognise the difference between intrinsic and extrinsic sources of motivation
21. Which of the following statements is false?

A. Group reward schemes help people identify with the group.
B. Group reward schemes discriminate between good and bad performers.
C. Group reward schemes avoid excessive competition between employees.
D. Group reward schemes may encourage 'freeloaders'.
AACSB: Reflective
Difficulty: Easy
14. The profitability of an investment centre can best be evaluated by:

A. the revenues, costs and investment the manager can control.
B. the total capital invested in the organisation and the sizeable amount of return.
C. the profit margin and the investment capital traceable to the investment
centre. D. the divisional contribution margin.
AACSB: Reflective
Difficulty: Easy
23. Which of the following statements is/are correct?

A. Invested capital is the assets that an investment centre has available to generate profit.
B. When evaluating an investment centre, only the profit is important.
C. Return on investment focuses on how effectively each investment centre has used its investment capital.
D. Invested capital represents the assets that an investment centre has available to generate profit AND return on
investment focuses on how effectively each investment centre has used its investment capital.
AACSB: Reflective
Difficulty: Easy
E. Which of the following is the correct mathematical expression for return on

investment? A. Sales margin capital turnover
B. Sales margin – capital turnover
C. Sales margin capital turnover
D. Capital turnover sales margin
AACSB: Reflective
Difficulty: Easy
15. White Hills Ltd reported a return on investment of 12 per cent, a capital turnover of 5 and income of $180 000.
What was the company's invested capital?
A. $300 000
B. $900 000
C. $1 500 000
D. $7 500 000
AACSB: Analytical
Difficulty: Medium
E. The northern division of Aussie Estates has reported a profit of $4 million. Divisional invested capital is $2.5 million
and the imputed interest rate is 12 per cent. What is the residual income?
A. $180 000 B.
$1.78 million C.
$2.15 million D.
$3 700 000
AACSB: Analytical
Difficulty: Easy
16. The Extan division of World Corporation reported a residual income of $200 000. The division had $8 million of
invested capital and a profit of $1 million. What is the imputed interest rate?
A. 7.5%
B. 10.0%
C. 12.5%
D. 20%
AACSB: Analytical
Difficulty: Easy
17. Speedy Ltd has an imputed interest rate of 12 per cent. Division Z of Speedy Ltd has invested capital of $800 000
and a return on investment of 15 per cent. What is the residual income?
A. ($24 000)
B. $24 000
C. $96 000
AACSB: Analytical
Difficulty: Easy
E. Return on investment may be improved by increasing:
A. cost of goods sold and expenses.
B. sales margin and cost of capital. C.
sales revenue and cost of capital. D.
capital turnover or sales margin.
AACSB: Reflective
Difficulty: Easy
18. All the following actions will increase return on investment except:
A. an increase in sales revenues.
B. a decrease in operating expenses.
C. a decrease in the company's invested capital.
D. a decrease in the number of units sold.
AACSB: Reflective
Difficulty: Easy
19. Given that return on investment measures performance over time, the invested capital would most appropriately be
calculated by using:
A. beginning of year
assets. B. average assets.
C. total assets. D.
current assets.
AACSB: Reflective
Difficulty: Easy
20. Which of the following measures of performance is based, in part, on weighted average cost of capital?
A. Return on investment
B. Capital turnover
C. Return on sales
D. Economic value added
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.07 Evaluate and calculate economic value added (EVA®) and shareholder value added (SVA) as measures of investment
centre performance
21. Tentafield Ltd has an after tax operating income of $2.6 million, assets totalling $8 million and current liabilities
totalling $400 000. The weighted average cost of capital is 10 per cent. What is the economic value added?
A. $1 400 000
B. $1 800 000
C. $1 840 000
AACSB: Analytical
Difficulty: Easy
centre performance
34.
The following information relates to Black's Mount Ltd:
What is its economic value added?
A. $120 000
B. $180 000
iv. $240 000
v. $292 000
AACSB: Analytical
Difficulty: Easy
centre performance
E. Which of the following are value drivers (i.e. create value for the business)?
i. Growth
ii. Sustainability
iii. Spread
iv. Cost of capital
A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
D. All of the given answers
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.06 Explain how shareholder value can be measured and used to manage performance
22. Which of the following strategies may increase economic value added?
A. Increase profit as a percentage of capital employed.
B. Borrow additional funds and invest in assets that earn more than the weighted average cost of
capital. C. Sell off assets that earn more than the weighted average cost of capital.
D.
Increase profit as a percentage of capital employed AND borrow additional funds and invest in assets that earn more than the weighted
average cost of capital.
AACSB: Reflective
Difficulty: Easy
centre performance
iv. Shareholder value added may be defined as: A.

corporate value – market value of the company. B.
corporate value – market value of debt.
C. corporate value – present value of liabilities.
D. corporate value – current liabilities.
AACSB: Reflective
Difficulty: Easy
centre performance
E. Which of the following are, according to Herzberg, motivating factors?

A. Recognition
B. Working conditions
C. Relationships with colleagues
D. Recognition AND working conditions
AACSB: Analytic
Difficulty: Easy
Learning Objective: 13.10 Describe the differences between Herzberg's two-factor theory and the expectancy theory of motivation
23. Which of the following is/are, according to Herzberg, hygiene factors?

A. Recognition
B. Working conditions
C. Relationships with colleagues
D. Working conditions AND relationships with colleagues
AACSB: Analytic
Difficulty: Easy
E. Which of the following is/are an extrinsic
reward? A. Share options
B. Job satisfaction
C. Promotion
D. Share options AND promotion
AACSB: Analytic
Difficulty: Easy
24. Which of the following is/are an intrinsic reward?

A. Share options
B. Job satisfaction
C. Promotion
D. Share options AND job satisfaction
AACSB: Analytic
Difficulty: Easy
E. Which of the following statements is/are correct when describing expectancy theory?
i. The preference that an employee has for a particular reward is called valence.
ii. Expectancy is the likelihood of achieving the performance necessary to earn the reward.
iii. An individual's perception that the effort put into a task will lead to a specific reward outcome is fundamental
to expectancy theory.
A. i and ii
B. ii and iii
C. i and iii
AACSB: Reflective
Difficulty: Easy
25. Which of the following are included in performance-related pay systems?

i. Share options
ii. Profit sharing
iii. Team-based bonuses
A. i and ii
B. i and iii
C. ii and iii
AACSB: Reflective
Difficulty: Easy
iv. Individual reward schemes have which of the following
advantages? i. They relate to individual effort.
ii. They reward only good performers.
iii. They discourage dysfunctional competition between individuals.
A. i and ii
B. i and iii
C. ii and iii
AACSB: Reflective
Difficulty: Easy
E. For which of the following reasons are group pay systems often preferred to individual schemes?
i. They encourage teamwork.
ii. They reduce dysfunctional competition between
employees. iii. They promote equity between employees.
A. i and ii
B. ii and iii
C. i and iii
AACSB: Reflective
Difficulty: Easy
26. Which of the following may be implemented as targets for a group or company-wide performance reward scheme?
i. Employee absenteeism
ii. Lost-time accidents
iii. Customer
satisfaction A. i and ii
B. ii and iii
C. i and iii
AACSB: Analytic
Difficulty: Easy
E. Sunrise Dairies has a return on investment of 15 per cent. A Sunrise division, which currently has a return on
investment of 13 per cent and $750 000 of residual income, is contemplating a large investment that will (1) reduce
divisional return on investment and (2) produce residual income of $120 000. If Sunrise strives for goal congruence, the
investment:
A. should not be approved because it reduces divisional return on investment.
B. should not be approved because the division's return on investment is less than the corporate return on
investment before the investment is considered.
C. should be approved because it produces $120 000 residual income for the division.
D. should be approved because, after acquisition, the division's return on investment and residual income are both
positive numbers.
AACSB: Analytic
Difficulty: Easy
Learning Objective: 13.03 Explain how the negative behavioural incentives associated with using return on investment to evaluate performance can
be minimised
27. The Fitzroy division of Brisbane Enterprises has negative residual income of $540 000. Fitzroy's management is
considering an investment opportunity that will reduce this negative amount to $400 000. The investment:
A. should be pursued because it is attractive from divisional and corporate perspectives.
B. should be pursued because it is attractive from a divisional perspective although not from a corporate perspective. C.
should be pursued because it is attractive from a corporate perspective, although not from a divisional perspective. D.
should not be pursued because it is unattractive from a divisional perspective although it is attractive from a corporate
perspective.
AACSB: Analytic
Difficulty: Easy
E. (p. 611)
Carlton division has been stagnant for the past five years, neither growing nor contracting in size and profitability.
Investment in new property, plant and equipment has been minimal. Would the division's use of total assets (valued
at net book value) when measuring return on investment result in (1) using numbers that are consistent with those in
the balance sheet and (2) a rising return on investment over time?
Consistent with numbers on the balance sheet Produce a rising return on investment over time
A.
Yes Yes
B.
No Yes
C.
No No
D.
Yes Need more information to judge
Difficulty: Medium
28. The income calculation for a divisional manager's return on investment should be based on:
A. divisional contribution margin.
B. profit margin controllable by the divisional
manager. C. profit margin traceable to the division.
D. division income before interest and income tax.
AACSB: Reflective
Difficulty: Easy
iv. Which of the following is used in the calculation of both return on investment and residual income?
A. Total shareholders' equity
B. Retained earnings
C. Invested capital D.
Cost of capital
AACSB: Reflective
Difficulty: Easy
centre performance
i. Return on investment encourages managers to take a long-term view of corporate performance.
E.Return on investment may encourage managers to defer the replacement of worn assets.
F. Return on investment may encourage managers to increase expenditure on research and development.
A. i and ii
B. ii and iii
C. i and iii
AACSB: Reflective
Difficulty: Medium
29. A division of a firm has a net profit of $640 000 before imputed interest and a residual income of $240 000. If a rate of
* per cent is used to compute imputed interest, calculate the division's return on investment (rounded to a
whole number).
A. 4%
B. 10%
C. 16%
D. 35%
AACSB: Analytical
Difficulty: Easy
E. Which of the following items do not form part of the economic value added
calculation? A. Weighted average cost of capital
B.
Book value of equity
C. Market value of equity

D. Income tax rate
AACSB: Reflective
Difficulty: Easy
centre performance
55.
Richard's Division of Richard and Sons has the following data related to a particular period:
Calculate the amount of residual income for the period.
A. $70 000
30. $7000
31. $77 000
32. $680 000
AACSB: Analytical
Difficulty: Easy
centre performance
56.
Calculate the return on investment for the period.
E. 11%
F. 10%
G. 4%
H. Always the same as the imputed interest rate
AACSB: Analytical
Difficulty: Easy
57.
Calculate the return on sales for the period.
31. 4%
32. 11%
33. 40%
34. 0.4%
AACSB: Analytical
Difficulty: Easy
58.
Calculate the investment turnover (rounded) for the period.
A. 0.37 times
B. 11 times
C. 0.11 times
D. 2.7 times
AACSB: Analytical
Difficulty: Easy
32. Which of the following items will be most relevant in determining the imputed interest rate for the purposes
of calculating residual income?
A. Final net profit
B. Return on investment
C. Investment turnover
D. Riskiness of investments undertaken
AACSB: Analytical
Difficulty: Easy
E. The return on investment of a division will increase if the division is able to:
A. increase return on sales and increase investment turnover.
B. increase return on sales or increase investment turnover.
C. increase sales revenue and decrease asset turnover.
D. increase return on sales and/or increase investment turnover.
AACSB: Analytical
Difficulty: Easy
33. Jasmine Dimm is a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre
are responsible for answering calls from Tostra customers. Some calls are very short, relating to simple enquiries.
However, a majority of calls tend to be longer, coming from irate customers complaining about Tostra's services. In these
calls, customers are often very emotional and sometimes even abusive. Call operators have no control over what types of
calls they get.
Jasmine has developed a new incentive system for her call centre staff. Under the new system, call centre operators are
rewarded if they achieve two performance targets: (1) the duration of 90 per cent of the calls is less than 4 minutes and
(2) 80 per cent of customers rate Tostra's 'customer service quality' as 'excellent'. Achieving these two monthly
performance targets will result in a bonus worth 20 per cent of the call operator's monthly salary.
Based on expectancy theory, the major limitation(s) of Jasmine's reward system is:
A. the incentive system lacks valence and instrumentality.
B. the incentive system lacks expectancy. C.
the incentive system lacks instrumentality.
D. the incentive system lacks expectancy and instrumentality.
AACSB: Reflective
Difficulty: Medium
E. Jasmine Dimm is a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre
are responsible for making sales calls to customers to promote Tostra's new products. Jasmine sets two performance
targets for her operators: sales and average call duration. Every 6 months, any call centre operator who can achieve both
targets goes into a random draw with a one-in-ten chance of winning a $50 supermarket giftcard.
All her call centre operators agree that these two targets are clearly specified, objectively measured and achievable with
hard work. However, the call centre operators are still unhappy with the new incentive system. According to the
expectancy theory, this is because:
A. the incentive system lacks valence and instrumentality.
B. the incentive system lacks expectancy.
C. the incentive system lacks expectancy and valence.
D. the incentive system lacks expectancy and instrumentality.
AACSB: Reflective
Difficulty: Medium
63.
A group-based reward system is appropriate when:

i. team work is important and employees need to work together to achieve organisational goals.
ii. it is easy to see individual's effort and performance.
iii it is important to discriminate between good performers and bad performers.
34. i
35. i and ii
36. i and iii
37. ii and iii
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.12 Outline the advantages and disadvantages associated with group versus individual rewards
E. Which of the following information is required to compute SVA (shareholder value added)?
i. PV of cash flows from operations for a certain time period
ii Residual value of the business
iii EVA (economic value added)
A. i and ii
B. i and iii
C. i, ii and iii
D. i
AACSB: Reflective
Difficulty: Easy
centre performance
65. Which of the following is a key difference between EVA and residual income?
A. The weighted average cost of capital is used to calculate EVA, but not necessarily for residual income.
B. Net profit is used to calculate residual income but is irrelevant for EVA.
C. EVA has a long term focus, but residual income has a short term focus.
D. There is no difference between EVA and residual income.
AACSB: Reflective
Difficulty: Easy
centre performance
66.
The following information is available for Jittie Ltd:
The WACC for Jittie Ltd is:
35. 7.6%
36. 9.25%
37. 10.9%
38. 9.5%
AACSB: Analytical
Difficulty: Easy
centre performance
67.
The following information is available for Nettie Ltd:
The company tax rate is 30 per cent. WACC is:
E. 11.2%
F. 10%
G. 7.8%
H. 9.5%
AACSB: Analytical
Difficulty: Medium
centre performance
68. Value-based management refers to:

A. a framework for applying EVA to all business decisions.
B. a framework for making key business decisions that add economic value to the business.
C. a philosophy that management should focus on creating customer value.
D. a valuation technique that uses discounted cash flows to estimate imputed cost of capital.
AACSB: Reflective
Difficulty: Easy
69. Which of the following statements about developing reward system is incorrect?
A. The key benefit of a profit sharing plan is to encourage employees to think like owners.
B. The key benefit of gain sharing plan is to introduce equity, ensuring the employees who contribute to the business can
get a share of the gains.
C. The key benefit of an employee share plan is to reduce free-riding problems.
D. The key benefit of an individual-based incentive system is to highlight improved expectancy and instrumentality.
AACSB: Reflective
Difficulty: Medium
36. Braham Farms has a return on investment of 15 per cent. A Braham division, which currently has a return on
investment of 13 per cent and $375 000 of residual income, is contemplating a large investment that will (1) reduce
divisional return on investment and (2) produce residual income of $60 000. If Braham strives for goal congruence,
the investment:
A. should not be approved because it reduces divisional return on investment.
B. should not be approved because the division's return on investment is less than the corporate return on
investment before the investment is considered.
C. should be approved because it produces $60 000 residual income for the division.
D. should be approved because, after acquisition, the division's return on investment and residual income are both
positive numbers.
AACSB: Analytic
Difficulty: Easy
be minimised
37. When employees feel that they have made a significant achievement in reaching the purpose of the task they
are working on, this has been identified (Robbins et al., 2004; Thomas, 2000) as:
A. competence.
B. progress.
C. meaningfulness.
D. choice.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 13.08 Explain how reward systems can be designed and used to enhance goal congruence
38. When employees have the opportunity in the larger scheme of things, to pursue a task that they consider worthy, this
has been identified (Robbins et al., 2004; Thomas, 2000) as:
A. competence.
B. progress.
C. meaningfulness.
D. choice.
AACSB: Reflective
Difficulty: Medium
39. Which of the following would be considered an advantage of a group scheme?

A. Equity among employees
B. Rewarding only good performers
C. Competitiveness between
employees D. Individual identification
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.12 Outline the advantages and disadvantages associated with group versus individual rewards
E. Under a deferred payment incentive schemes managers are likely to:
A. maximise short-term profit.
B. focus on short-term plans.
C. maximise medium and long-term profits.
D. strive for short-term performance.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 13.13 Recognise the importance of the frequency and timing of the payment of incentive payments to enhance motivation
and performance
40. Providing an employee incentive scheme that offers more frequent and timely incentives will:
A. discourage employees from making performance targets.
B. continually motivate employees.
C. not impact on an employee's performance.
D. provide no indication of an employee's target achievements.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 13.13 Recognise the importance of the frequency and timing of the payment of incentive payments to enhance motivation
and performance
41. Jasmine Dimm is a call centre manager for Tostra, a mobile phone company. Call centre operators at her call centre
are responsible for answering calls from Tostra customers. Some calls are very short, relating to simple enquiries.
However, a majority of calls tend to be longer, coming from irate customers complaining about Tostra's services. For
these calls, customers are often very emotional and sometimes even abusive. The call centre operators are only
responsible for documenting the complaints and are generally unable to solve the problems for the customers. Jasmine
has developed a new reward system for her call centre staff. Under the new system, call centre operators are rewarded
with a substantial bonus (20 per cent of annual salary) if they achieve two performance targets: (1) a target set on
average call duration; and (2) a target based on 'customer service quality'. While the call centre operators working for
Jasmine all agree that these performance targets are reasonable, they are unhappy with Jasmine's overbearing
personality. Many operators are also experiencing a lot of stress when dealing with rude customers.
Discuss the limitations of Jasmine's new reward system, using the concept of intrinsic motivation and extrinsic motivation.
Extrinsic motivations are derived from outside of the individual. Intrinsic motivations are derived from the interests and
enjoyment at work. Jasmine's reward system focuses only on extrinsic rewards, namely the substantial financial bonuses.
However, because of Jasmine's overbearing personality, it is likely employees do not feel happy or satisfied working
under her. Answering calls from complaining customers are not likely to result in job satisfaction, especially if there is
nothing the operator can do to solve customers' problems. Thus, the work is unlikely to be meaningful and intrinsic
motivation will be low.
Difficulty: Hard
42. Identify and describe two advantages and two limitations of using return on investment (ROI) to evaluate the
performance of investment centres.
The Advantages of ROI

Return on investment is used by many decentralised businesses to evaluate the performance of investment centres. It has some
positive features:
E. It encourages managers to focus on both profits and the assets required to generate those profits. Thus, managers of investment
centres must consider the relationships between profits and invested capital. It discourages excessive investment in assets, which may
occur if performance is measured only on absolute profit. It also encourages managers to focus on increasing revenue and reducing
costs.
F. Return on investment can be used to evaluate the relative performance of investment centres, even when those business units have
different scales of operations. Thus, we can compare the ROI of a small business with that of a large business.
THE LIMITATIONS OF ROI
Against these advantages, a significant emphasis on achieving ROI can lead to dysfunctional decisions:
43. It can encourage managers to focus on short-term financial performance, at the expense of the long term. Many ways of
increasing ROI can result in reduced performance in the future. Excessive cost-cutting activities can improve profit, and hence short-
term ROI, but weaken future profits and the business's future competitiveness. For example, research and development, or training
expenditure, can be deferred. Reducing employee numbers can increase profit but may affect product quality or the level of customer
service.
44. Return on investment can encourage managers to defer asset replacement. Asset replacement may be deferred (particularly
when those old assets are fully depreciated), as the purchase of new assets would boost the size of the invested capital. Deferring the
replacement of assets may improve ROI in the short term, but erode the competitiveness and profits of the business in later years.
Disposing of productive assets can decrease the investment base and increase ROI, but also reduce the capacity of the business and
future profits/ROI. These problems are partially caused by the way in which assets are measured in the ROI calculation.
45. Return on investment may discourage managers from investing in projects that are acceptable from the total organisation's
point of view. This will occur when the project decreases the investment centre's ROI.
AACSB: Reflective
Difficulty: Medium
78. Discuss three ways that the problems associated with using Return on Investment (ROI) can be minimised.
The problems associated with ROI can be minimised in the following ways.
E. Using ROI as only one of a series of performance measures that focus on both short-term and long-term
performance. This approach is taken by many companies. A more balanced set of measures (both financial and non-
financial) can counter the dysfunctional incentives associated with ROI.
F. Considering alternative ways of measuring invested capital, so that the replacement of an asset is less likely to result
in a reduction of ROI. Many businesses measure invested capital at its carrying amount, which is often low at the time of
asset replacement. If alternative measures of invested capital, such as market value or replacement cost, are used, the
replacement decision will not cause a major change in the investment base.
G.Using alternative financial measures, such as residual income or economic value added.
AACSB: Reflective
Difficulty: Easy
be minimised
44. When measuring profit and invested capital, managers have to decide how they will define what will be included in
invested capital, then apply that definition consistently throughout the one organisation. Identify and explain with an
example, the three definitions of invested capital that can be applied.
Exhibit 13.1 shows that the Smelting business had balances at the end of the financial year of $185 million in current assets; $700
million in non-current assets such as plant and equipment; and $15 million tied up in a plant under construction. In addition, the balance
of current liabilities was $110 million.
There are several ways of defining 'invested capital':
Total assets. This measure of invested capital is appropriate if the investment centre manager is responsible for decisions about all of
the assets of the investment centre, including non-productive assets.
Total productive assets. In some companies, investment centre managers may be directed by corporate management to retain non-
productive assets such as vacant land or construction in progress. In such cases it is appropriate to exclude these non-productive
assets from the measure of invested capital. Under this alternative, $885 million would have been used in the ROI and residual income
calculations (total assets of $900 million less $15 million for the plant under construction).
Total assets less current liabilities. In some companies, managers in investment centres manage certain short-term liabilities, including
short-term bank loans and employee entitlements such as the provision for long-service leave. In these cases, invested capital can be
measured as total assets less current liabilities. This approach encourages the managers to minimise resources tied up in assets and to
manage the use of short-term credit to finance operations. If this approach had been used by the Smelting business, the invested
capital would have been $790 million (total assets of $900 million less current liabilities of $110 million).
AACSB: Analytical
AACSB: Reflective
Difficulty: Medium
E. Value-based management (VBM) is a framework for making key decisions that add economic value to the business.
Morin & Jarrell (2001) identified four aspects of VBM. Identify these four aspects and in your own words outline how
these aspects assist managers in their decision making.
When organisations use shareholder value analysis to manage their business, they are said to be practising value-based management
(VBM), which is a framework for making key business decisions that add economic value to the business. A particular strategy or
decision creates shareholder value, where the return on capital is greater than the cost of capital. Thus, managers need to understand
how to generate, evaluate and select business strategies, or undertake activities that will increase the value of the firm. This involves
being able to measure the value created from decisions, such as whether to acquire a new business or move into new markets. Product
lines or business units that are not providing sufficient value may be deleted, and the outcomes of a proposed project or asset
acquisition can be analysed in terms of value creation.
There are four aspects of VBM: valuation, strategy, finance and corporate governance (Morin & Jarrell,
2001). Valuation
Value can be measured in several ways. Discounted cash flow (DCF) models are commonly used to measure value. The use of DCF
to measure shareholder value makes sense, as investors and the capital markets often value a business based on the discounted
future cash flows of the business. In some cases, however, it is difficult to measure such cash flows, so surrogates may be used. For
example, the market capitalisation of the company—that is, the market price per share multiplied by the number of shares on issue—
may be used.
To increase the value of a firm, managers need to understand the drivers of value. Value drivers are the activities or actions that create
value for a business. These drivers include:
spread, which is the degree to which a firm can earn a return that is greater than its cost of capital;
growth in funds available to invest in value-creation activities; sustainability of those funds over
many years; and
cost of capital.
The first three drivers increase cash flow, which interacts with the cost of capital to increase shareholder
value. Strategy, finance and corporate governance
The other three aspects of VBM are strategy, finance and corporate governance. Strategic decisions have a substantial and continuing
impact on the value of a business. Valuation techniques can assist managers to compare the value created by alternative
differentiation or cost strategies. Financial policies, such as the adoption of particular financial and capital structures that reduce the
cost of capital, will also influence value creation.
Corporate governance involves selecting and implementing systems that contribute to value creation. Performance measures can be
developed to measure the value-creating performance of business units and managers. Managerial reward systems can be designed to
link managers' compensation to their performance in creating value, as well as to guide managers' value creation activities.
AACSB: Reflective
Difficulty: Hard
45. Motivation of staff is a key factor in a company achieving their goals and ensuring goal congruence.
TRUE
AACSB: Reflective
Difficulty: Easy
iv. Invested capital can be defined as net assets, total assets, productive assets or working capital.
FALSE
AACSB: Reflective
Difficulty: Medium
E. When using residual income, some companies prefer to use the weighted average cost of capital as a basis for
determining the imputed interest charge.
TRUE
AACSB: Reflective
Difficulty: Easy
46. Companies using value-based management operate within a framework of making key decisions that add economic
value to the business.
TRUE
AACSB: Reflective
Difficulty: Easy
centre performance
E. The formula for economic value added and the residual income are interchangeable.
FALSE
AACSB: Reflective
Difficulty: Easy
centre performance
47. Gainsharing is one system companies can use to distribute cash bonuses to employees when the performance of
their segment outperforms the set target.
TRUE
AACSB: Reflective
Difficulty: Easy
E. One of the main advantages of return on investment is that it can be used with some responsibility centres to
evaluate performance.
TRUE
AACSB: Reflective
Difficulty: Easy
48. Expectancy theory relates employee motivation to valence, expectancy and instrumentality.
TRUE
AACSB: Reflective
Difficulty: Easy
E. Designing incentive schemes systems is an easy process and is a definite way of ensuring goal congruence.
FALSE
AACSB: Reflective
Difficulty: Easy
49. Return on equity and investment turnover are the components of the expanded return on investment [ROI] formula
that enables management to identify ways of improving the ROI.
FALSE
AACSB: Reflective
Difficulty: Easy
E. The imputed interest rate is the firm's required rate of return.

TRUE
AACSB: Reflective
Difficulty: Easy
50. Value drivers are the activities or actions that decrease value for a business.
FALSE
AACSB: Reflective
Difficulty: Easy
E. According to Herzberg's two-factor theory, the degree to which the outcome satisfies the individual's goals, and
the attractiveness of the reward for the individual is known as valence.
TRUE
AACSB: Reflective
Difficulty: Easy
)
lOMoARcPSD|9693341
56. Which of the following are likely to cause some non-financial measures to be unable to be translated into
financial outcomes?
i. Reduced machine breakdowns
ii. Increased spending on new technology
iii. Improved on-time deliveries
iv. Reduced marketing
effort A. i and ii
B. i and iii
C. i and iv
D. ii and iv
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.04 Outline the limitations of relying on non-financial performance measures
60. A visual representation that assists managers to see the linkages between the balanced scorecard
and the organisation's objectives is known as a:
A. linking presentation.
B. visual scorecard. C.
organisational chart. D.
strategy map.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.06 Outline the purpose of a strategy map
64. Which of the following do traditional measurement systems

include? i. Profitability
ii. Return on investment iii.
Cost variance analysis iv.
Budget variance analysis A.
i, ii and iii
B. ii, iii and iv
C. i, iii and iv
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.01 Explain why traditional financial performance measures alone are not sufficient for managing an organisation
lOMoARcPSD|9693341
68. Which of the following statements are limitations associated with traditional performance
measures? i. They may encourage short-term financial performance.
ii. They describe results not causes.
iii. They do not emphasise areas that need development for long-term goal achievement.
A. i and ii
B. ii and iii
C. i and iii
AACSB: Reflective
Difficulty: Easy
71. Which of the following are likely to be the result of concentration on short-term performance
measures? i. Reduced expenditure on product development
ii. Increased spending on new technology
iii. Increased employee training
iv. Reduced marketing
effort A. i and ii
B. i and iii
C. i and iv
D. ii and iv
AACSB: Reflective
Difficulty: Easy
74. All the following are methods of comparison used in performance measurement. Which are inadequate as
modern measures?
i. Standard costs
ii. Past periods iii.
Budget targets iv.
Benchmarks A. i,
ii and iv
B. ii, iii and iv
C. i, iii and iv
D. i, ii and iii
AACSB: Reflective
Difficulty: Easy
lOMoARcPSD|9693341

A. Non-financial measures may reflect drivers of future financial performance.
76. Non-financial measures are more difficult to understand.
77. Non-financial measures are more difficult to action.
D.
Non-financial measures may reflect drivers of future financial performance AND non-financial measures are more difficult to
understand.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.02 Explain the advantages that non-financial performance measures offer over financial measures

i. Non-financial measures are only applicable when profit is not a principle goal of the firm.
78. It is often difficult to take any action because of non-financial measures.
79. At the operational level, it is often easier to relate to non-financial
measures. A. ii and iii
B. i and iii
C. i and ii
AACSB: Reflective
Difficulty: Easy
80. Which of the following are performance measures of delivery at the shop floor
level? i. Standard cost variances
ii. Accident reports
iii. Schedule adherence
iv. Number of units
completed A. iii and iv
B. ii and iii
C. i and iii
D. ii and iv
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.03 Select appropriate forms of operational measures to assess different areas of operational performance
86. On which of the following is the Kaplan and Norton framework for developing a balanced scorecard is based?
i. Financial perspective
ii. Customer
perspective iii. Learning
and growth iv. Internal
processes A. i, ii and iii
B. ii, iii and iv
C. i, iii and iv
Difficulty: Easy
Learning Objective: 14.05 Explain the characteristics of the balanced scorecard
lOMoARcPSD|9693341
2. The number of products returned by customers, the number of product defects and on-time delivery are
measures related to:
A. financial perspective.
B. customer perspective.
C. internal business processes.
D. learning and growth.
AACSB: Reflective
Difficulty: Easy
3. Employee satisfaction, absenteeism and employee suggestions implemented are measures related
to: A. financial perspective.
AACSB: Reflective
Difficulty: Medium
E. Performance measures, which include cost, product quality and manufacture cycle time, are related
to: A. financial perspective.
D.
learning and growth.
AACSB: Reflective
Difficulty: Medium
4. Performance measures, including shareholder value, residual value and cash flow are related to:
A. financial perspective.
AACSB: Reflective
Difficulty: Easy
lOMoARcPSD|9693341
F. (p. 642) Which of the following are used by most successful organisations when evaluating performance?
Financial performance measures Non-financial performance measures
A.
No Yes
B.
Yes No
C.
Yes Yes
D.
To a limited degree only Yes
AACSB: Reflective
Difficulty: Easy
6. An increasingly popular approach that integrates financial and customer performance measures with measures in
the areas of internal operations and innovation is known as:
A. the integrated performance measurement tool.
B. the balanced scorecard.
C. integrated efficiency.
D. benchmarking.
AACSB: Reflective
Difficulty: Easy
F. Southern Cruises Ltd, which operates in a very competitive marketplace, is considering four categories of
performance measures: (i) profitability (ii) customer satisfaction (iii) efficiency and quality and (iv) innovation. The
company assigns one manager to each ship in its fleet to oversee the ship's general operations. If Southern Cruises
Ltd desired to adopt a balanced scorecard approach, which measures should it use in the evaluation of managers?
A. i and ii B.
ii and iii C. i,
ii and iv
AACSB: Reflective
Difficulty: Easy
lOMoARcPSD|9693341
7. Measures that monitor the progress towards the organisation's goals are called:
A. lead indicators.
B. lag indicators.
C. benchmark indicators.
D. progress indicators.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.07 Demonstrate the cause-and-effect linkages between measures in a strategic performance measurement system
8. Measures that monitor the factors that drive outcomes are called:
A. lead indicators.
B. lag indicators.
C. benchmark indicators.
D. cause and effect indicators.
AACSB: Reflective
Difficulty: Easy
F. Market share may be a lead indicator from:

A. a financial perspective.
B. a customer perspective.
AACSB: Reflective
Difficulty: Medium
9. Market share may be a lag indicator

from: A. a financial perspective.
B. a customer perspective.
AACSB: Reflective
Difficulty: Medium
F. Elements that derive from the competitive strategy and are essential to the success of the organisation are called:
A. key performance indicators.
B. critical success factors.
C. key performance factors.
D. critical success drivers.
AACSB: Reflective
Difficulty: Easy
lOMoARcPSD|9693341
10. On which of the following does a balanced scorecard approach focus

on? A. Strategic objectives
B. Critical success factors
C. Performance measures at all levels of the business
AACSB: Reflective
Difficulty: Easy
F. The ultimate performance measure is expressed in financial terms; however, it is often difficult to relate non-
financial measures to financial outcomes. Which of the following may be reasons for apparent success in improving
non-financial measures not translating into financial improvement?
A. Failure to utilise freed-up resources
B. Identifying incorrect critical success factors
C. Incorrect design of performance measures
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.10 Explain why improving non-financial performance may not always lead to improved financial performance
11. Which of the following may result in failure to utilise the freed up resources flowing from improved performance?
A. Difficulty in disposing of excess equipment
B. Inability to increase sales to take up the idle capacity
C. Imbalance between resources made idle and those required for increasing activity levels
AACSB: Reflective
Difficulty: Easy
I. The essential element of a Du Pont chart is that it:

A. includes financial measures.
B. includes key performance indicators.
C. includes key performance drivers.
D. identifies linkages between A, B and C.
AACSB: Reflective
Difficulty: Easy
lOMoARcPSD|9693341

i. A Du Pont chart includes lag indicators for revenue measures.
12. A Du Pont chart includes lead indicators for costs.
13. A Du Pont chart fails to show any relationship between cost and invested capital.
14. A Du Pont chart clearly shows the relationship between lead indicators and invested
capital. A. i, ii and iii
B. ii, iii and iv
C. i, ii and iv
AACSB: Reflective
Difficulty: Easy
F. The steps to be taken in the benchmarking process

are: i. establishing performance goals.
ii. identifying functions or activities to be benchmarked.
iii. implementing plans.
iv. data collection and analysis.
v. selecting benchmark partners.
What is the correct sequence of these
steps? A. i, ii, iii, iv and v
B. ii, v, iv, i and iii
C. iii, ii, i, v and iv
D. ii, v, i, iv and iii
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.12 Describe the basic steps of benchmarking and explain how benchmarking can improve competitiveness
13. The extent to which a business needs to improve to reach best practice is
termed: A. performance target.
B. performance goal.
C. performance gap.
D. performance driver.
AACSB: Reflective
Difficulty: Easy
F. Benchmarking that involves comparison with firms with similar interests and technologies is
termed: A. competitive benchmarking.
B. industry benchmarking.
C. process benchmarking.
D. external benchmarking.
AACSB: Reflective
Difficulty: Easy
lOMoARcPSD|9693341
14. Benchmarking that involves comparison with best practices that occur in any industry is termed:
A. internal benchmarking.
AACSB: Reflective
Difficulty: Easy
F. Normalisation is used to remove the effects of factors outside the control of the organisation
in: A. competitive benchmarking.
AACSB: Reflective
Difficulty: Easy
15. Which is the easiest form of benchmarking to establish?

A. Competitive benchmarking
B. Internal benchmarking
C. Industry benchmarking
D. Process benchmarking
AACSB: Reflective
Difficulty: Easy
F. An important concern for all companies in competitive markets is to access competitors' costs. It is clear that
competitors will not willingly supply cost data and thus other sources need to be explored. Which of the following may
be used to identify competitors' costs?
A. Publicly available data such as sales volume, market share and product
mix B. Industry databases
C. Company reports and analyses from
stockbrokers D. All of the given answers
AACSB: Reflective
Difficulty: Easy
lOMoARcPSD|9693341
35.
Which of the following performance measures would be classified as a lag indicator for a coachline company whose objective was to
improve profitability?
A. Number of new passengers each month

B. Profitability of each trip
C. Cost of diesel fuel
D. Average ticket cost per kilometre
AACSB: Reflective
Difficulty: Medium
Learning Objective: 14.08 Formulate a strategy map and a balanced scorecard for an organisation
16. One of the signs that a firm's performance measurement system is inadequate is when performance measures show
improvement but this is not translated into profit. In which of the following circumstances may this occur?
i. Resources freed up through improvements may not have been utilised to improve profitability.
ii. Factors being measured are not critical success factors.
iii. Too many similar measures are used.
iv. There is a time lag between improved performance and improved
profitability. A. i, ii and iii
B. ii, iii and iv
C. i, ii and iv
D. i, iii and iv
AACSB: Reflective
Difficulty: Easy
F. Which of the following would be classified as a lead indicator for a bus company where customer satisfaction was
their objective?
A. Customer satisfaction measure
B. Number of new passengers per
month C. Number of bus accidents
D. Number of regular customers retained
AACSB: Reflective
Difficulty: Medium
17. In which of the following sectors has the balanced scorecard been widely used?
A. Not-for-profit
B. All of the sectors use balanced scorecards
C. Government
D. Business
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.09 Explain why balanced scorecard implementations are not always successful
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18. According to the Du Pont chart, Return on Investment (ROI) links directly
to: A. Profit and revenues.
B. Revenues and costs.
C. Invested capital and revenues.
D. Profit and invested capital.
AACSB: Reflective
Difficulty: Medium
F. Organisations that aim to become and remain world-class will strive

for: A. continuous improvement.
B. greater profitability. C.
increased investment. D.
market leadership.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.11 Describe how continuous improvement can be built into a performance measurement system
19. Which of the following statements most correctly completes the following sentence that identifies some of
the limitations of traditional management accounting? 'Traditional management accounting focuses on '
A. financial performance measures, labour-related activity measures and cost elimination.
B. financial performance measures, volume-related activity measures and cost control.
C. non-financial performance measures, labour-related activity measures and cost elimination.
D. financial performance measures, labour-related activity measures, cost elimination, volume-related activity measures
and cost control.
AACSB: Reflective
Difficulty: Medium
42. Which of the following statements is most correct about the selection of performance measures?
A. The key stakeholders are the owners of the firm and therefore financial performance measures will always be the most
crucial.
B. In today's environment, firms are likely to have an appropriate mix of both financial and non-financial
performance measures.
C. In the modern manufacturing environment, it is likely that non-financial performance measures will replace
financial performance measures.
D. Because of the focus on critical success factors, it is likely that non-financial performance measures will
replace financial performance measures.
AACSB: Reflective
Difficulty: Easy
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20. Assuming you must choose one measure only, which of the following non-financial performance indicators would
most likely be chosen to measure employee satisfaction?
A. Number of repeat orders B.
Percentage of absenteeism
C. Number of complaints about
service D. Percentage of idle time
AACSB: Reflective
Difficulty: Easy
most likely be chosen to measure quality?
C. Machine downtime
D. Percentage of idle time
AACSB: Reflective
Difficulty: Easy
most likely be chosen to measure satisfaction with delivery?
C. Number of complaints about
service D. Units produced
AACSB: Reflective
Difficulty: Easy
vi. Assuming you must choose one measure only, which of the following non-financial performance indicators would
most likely be chosen to measure productivity?
A. Units produced per month
B. Number of repeat orders C.
Percentage of absenteeism D.
Percentage of idle time
AACSB: Reflective
Difficulty: Easy
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F. Assuming you must choose one measure only, which of the following non-financial performance indicators would
most likely be chosen as a measure of the production process?
Percentage of idle time C.
D. Number of complaints about service
AACSB: Reflective
Difficulty: Easy
23. Which of the following non-financial indicators measures product

availability? A. Number of overdue deliveries
B. Percentage of stock outs
C. Downtime/total time
D. Percentage of warranty claims
AACSB: Reflective
Difficulty: Easy
v. Which of the following statements about performance measures is most correct and
complete? A. Most financial performance measures are lead indicators.
B. Most financial performance measures are lag indicators. C.
All non-financial performance measures are lead indicators.
D. All non-financial performance measures are lag indicators.
AACSB: Reflective
Difficulty: Medium
F. From the following statements about benchmarking, select the incorrect

statement. A. Benchmarking involves working towards best practice.
B. Benchmarking requires selection of a benchmarking partner.
C. Benchmarking requires measuring against another firm in exactly the same type of
business. D. Benchmarking involves continuous improvement.
AACSB: Reflective
Difficulty: Medium
24. What items or perspectives are measured in the balanced scorecard?

A. A firm can choose to measure whatever items it considers important
B. Financial and customer
C. Internal business D.
Learning and growth
AACSB: Reflective
Difficulty: Medium
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F. A firm using the balanced scorecard has included among its strategies 'to improve bottom-line profit we need to
improve working conditions'. Which of the following statements best describes the evaluation of the firm's success in
implementing the strategy?
A. It is impossible to determine whether the strategy has been successful.
B. The only way to measure success is to survey employees.
C. A number of performance evaluation measures will need to be put in place, but even with favourable results on those
measures, the firm cannot conclude that the profit resulted from the improvement in working conditions.
D. If managers can observe employees' motivation they will have a good idea of the success or otherwise of the strategy.
AACSB: Reflective
Difficulty: Medium
25. Benchmarking exercises are most likely to focus on:

A. production activities of the firm.
B. activities of the firm that are reported in financial performance measures.
C. factors which are identified as critical success factors for the firm.
D. items the firm has identified as one of its 'weaknesses' in a SWOT analysis.
AACSB: Reflective
Difficulty: Easy
F. Which of the following comments best describes the appropriate application of benchmarking to a medium-sized
Australian company with a range of products and services specifically designed for local conditions and demands?
A. In the absence of a valid basis for comparison, benchmarking is unlikely to be informative in this case.
B. Benchmarking should be based on world best practice for the nearest equivalent organisation.
C. Efforts should be made to compare particular activities and processes with similar processes elsewhere, allowing
for differences in the business environment.
D. The use of benchmarking may inhibit originality in meeting the special features and unique needs of the firm's market.
AACSB: Reflective
Difficulty: Medium
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26. The management accountant at Kaster Furniture Makers decides to include the following measures on their
balanced scorecard (BSC): customer satisfaction, rework costs, on-time delivery, average shopfloor personnel
qualification and sales growth in local markets. These measures belong to which BSC perspectives?
A.
Financial perspective Internal business process perspective

Sales growth in the local markets On-time delivery, customer satisfaction
Customer perspective Learning and growth perspective
Rework costs, average shopfloor personnel qualification
B.
Sales growth in the local markets Rework costs
On-time delivery, customer satisfaction Average shopfloor personnel qualification
C.
Rework costs On-time delivery
Sales growth in the local markets, customer satisfaction Average shopfloor personnel qualification
D.
Sales growth in the local markets; Rework costs On time delivery; Average shopfloor personnel qualification
Customer satisfaction
AACSB: Reflective
Difficulty: Medium
v. The internal business process perspective of a balanced scorecard may contain which of the following set of
performance measures?
A. Sales force efficiency, percentage of warranty claims, number of employees completed internal
training B. Defect costs, employee satisfaction rating, number of customer complaints
C. Sales force efficiency, scrap costs, percentage of machine downtime
D. Number of incorrect deliveries to customers, production cycle time, profit margin
AACSB: Reflective
Difficulty: Medium
F. Which of the following is the most appropriate lead indicator in relation to 'customer satisfaction rating'?
A. Market share
B. Number of customer
complaints C. Percentage of on-
time delivery D. Sales growth
AACSB: Reflective
Difficulty: Medium
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27. Which of the following is the most appropriate lag indicator in relation to 'customer satisfaction
rating'? A. Sales growth
B. Number of customer complaints
C. Percentage of employees with tertiary qualifications
D. Percentage of on-time delivery
AACSB: Reflective
Difficulty: Medium
F. Which of the following is the most appropriate lag indicator in relation to 'percentage of products passed final
quality inspection'?
A. Percentage of machine downtime
B. Number of customer complaints
C. Percentage of on-time delivery
D. Number of employees who completed quality training
AACSB: Reflective
Difficulty: Medium
28. Which of the following about a strategic performance measurement system (SPMS) is incorrect? A. It
is a system that focuses on translating a strategy into financial and non-financial measures.
B. SPMS requires linking performance measures in cause-and-effect relationships.
C. SPMS always require the development of a strategy map first, followed by a balanced scorecard.
D. SPMS can be used by non-profit organisations.
AACSB: Reflective
Difficulty: Medium
61. Which of the following statements about the DuPont chart is incorrect?
A. It shows that return on investment can be decomposed into profit and costs.
B. It identifies lead indicators of revenue.
C. It identifies lead indicators of costs.
D. Its underlying assumption is that return on investment is the 'ultimate' goal.
AACSB: Reflective
Difficulty: Medium
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62.
The balanced scorecard requires measures to 'cascade down' an organisation, this means:
A. Managers should start with the lag indicators and work downwards to identify lead indicators.
B. Managers should start with the lead indicators and work downwards to identify lag indicators.
C. Managers should produce reports that are highly aggregated and then allow users to 'drill down' each measure to find
more specific details. This avoids information overload.
D. Managers should ensure that objectives, performance measures and targets of organisational units and individual
managers are reflective of the objectives, performance measures and targets at the higher organisational levels.
AACSB: Reflective
Difficulty: Medium
F. Echo Beetle is an interior design and renovation management firm. The customer perspective of Echo Beetle's
balanced scorecard contain these two measures: (1) client satisfaction rating and (2) percentage of projects completed
on-time. Which of the following are the most appropriate measures on Echo Beetle's internal business process
perspective?
A. Adherence to project schedule (%), number of projects that passed internal quality inspection
B. Machine down time, productivity
C. Product defects, number of customer complaints
D. Time employees spent on training, cost per project
AACSB: Reflective
Difficulty: Hard
64. Which of the following is not a limitation of a non-financial measure?

A. Managers find it difficult to select measures because there is a wide choice of non-financial measures.
B. Managers find that some non-financial measures, such as customer satisfaction rating, lack integrity and are hard to
verify.
C. Non-financial measures are often too simplistic, such that managers find it hard to draw meaningful conclusions from
examining non-financial measures.
D. Non-financial measures do not always 'translate' to financial outcomes.
AACSB: Reflective
Difficulty: Medium
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65. Traditional performance systems

Indicate the limitations that may occur with traditional performance systems.
Traditional financial measures have limitations and are not sufficient to manage an organisation. The reasons include the following:
1 Financial performance measures emphasise only one perspective of performance. Businesses need to manage the determinants of
future financial performance, and this is where strategy plays a role. Senior management determines the strategies that will be
implemented to enable the business to achieve long-term goals.
Managers need a performance measurement system that assesses how well they perform across the full range of
strategically important areas, such as quality and delivery, as well as cost.
2 Traditional financial performance measures focus on the consequences, not the causes. Measures of profit, and its components,
costs and revenues describe the financial consequences of decisions and activities, not causes. They describe what has happened,
not why it has happened. They are too aggregated and they do not tell managers what needs fixing. Also, summary financial measures
are often reported at the end of each month, so they are not timely. Businesses cannot afford to wait that long.
3 Financial performance measures provide limited guidance for future actions. Financial measures do not allow managers to assess
areas that need to be developed for the organisation to be successful in the long term. For example, to ensure future growth,
managers need to determine how effectively they have invested in areas such as new product development, development of staff and
actions to ensure customer loyalty. Financial measures report on the financial outcomes of past decisions and actions.
4 Financial performance measures may encourage actions that decrease both shareholder and customer value. Financial measures
may encourage managers to achieve short-term financial performance at the expense of long-term performance. This happens
particularly when there is excessive pressure on managers to achieve short-term profit improvements, and where remuneration
systems are closely tied to short-term profit achievement. For example, managers can improve short-term performance by reducing
expenditure on new product development, quality initiatives, human resource development (including training), information systems,
and customer and market developments. While these spending cuts cause an immediate increase in profits, they can seriously erode
future profits and growth potential, and thus decrease shareholder value. Retaining outdated technology and systems can reduce
competitiveness, and a lack of attention to products, customers and the market can lead to a reduction in customer value and customer
loyalty, leaving a company open to competitive threats.
These limitations arise largely from the particular orientation of financial performance measurement systems—they focus on the
financial outcomes of past decisions and action, not on the determinants of those outcomes.
Difficulty: Easy
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66.
Modern measurement systems

What are the essential limitations associated with the use of non-financial measures?
Limitations associated with the use of non-financial measures include:

29. There is a wide choice of non-financial measures available. As you can see in Exhibit 14.2 (see page 618), quality is
measured in many ways. Are all of these measures necessary? How do managers select appropriate quality measures?
30. The inclusion of non-financial measures can be ad hoc and undirected. A proliferation of measures can occur over time,
as new measures are adopted in response to a particular problem. However, old measures may not be discontinued. This was
certainly the experience at Mitsubishi.
31. Managers must necessarily make trade-offs. Exhibit 14.2 (see page 618) indicates that there are many measures to focus
on at each level of management. Which measures are the most important? What should a manager do if certain actions improve
some measures but not others? For example, improving the quality measure 'number of defects' may result in an increase in the cost
driver measure 'labour hours per unit'.
32. Some non-financial measures may lack integrity. Data used to calculate non-financial performance measures may be
gathered in a variety of ways—manually, computerised, by an external party—and because the accuracy of the data may be difficult
to verify (compared with financial data recorded in the accounting system), there is potential for measures to be incomplete,
inaccurate and manipulated.
33. Some non-financial measures may not easily translate into financial outcomes. Some managers 'take it on faith' that
improving measures such as number of machine breakdowns, customer satisfaction or the number of on-time deliveries will lead
to improved profits.
AACSB: Reflective
Difficulty: Medium
67. Balanced scorecard

Explain the fundamental characteristics of a balanced scorecard.
A balanced scorecard is an attempt to identify and report on performance measures for each important strategic area of the business.
In broad terms, it covers:
— Financial perspective; that is, financial outcomes of actions are measured with a view to establishing their impact on shareholder
value. Examples include return on investment, profit and cash flow.
— Customer perspective; that is, the measures that assess the impact of actions on customer value. Examples include customer
satisfaction, market share and number of new customers.
— Internal business perspective; that is, the operations of the organisation. Examples include short-term monitoring of the activities
associated with product design, marketing and production (production, upstream and downstream costs).
— Learning and growth; that is, the facilities that concentrate on the long-term growth and development of the organisation. Examples
include multi-skilling, absenteeism and new product developments commenced.
— Measures in each category include lead indicators (key performance drivers) and lag indicators (key performance indicators)
appropriately linked to critical success factors.
Difficulty: Easy
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68. Benchmarking
Explain the different ways in which benchmarking may be achieved and the limitations of each.
Internal benchmarking
Benchmarking between different business units in the same firm (e.g. car companies) will often benchmark between subsidiaries in
different countries that are essentially functioning in the same manner. However, this does not provide the world's best practice
benchmarks.
Competitive benchmarking
This is the most desirable form of benchmarking because it compares directly with competitors. However, it is difficult to obtain
comprehensive information about competitors and the comparison is often restricted to information in the public domain. This will
provide less reliable data for comparison. It is therefore more appropriate to compare specific activities where information is more
reliable.
Industry benchmarking
This involves comparison with firms with similar technologies and interests but only with those that do not compete directly. Thus,
direct comparison of performance measures and practices is possible. Clearly, this can be achieved where industries are localised,
such as the building industry. There is a high level of commonality and both parties will benefit from benchmarking.
Best-in-class or process benchmarking
This involves comparison, with any industry, of a common practice such as human resource management. However, these
comparisons should be treated with caution as the context of the two firms may make comparison difficult or misleading. Under these
circumstances, normalisation can take place; that is, removing the effect of factors that are outside the control of the organisation. This
may be difficult because assessing the effect of differences is often subjective.
Difficulty: Easy
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G. Identify and discuss the four main reasons why improved non-financial performance at an operational level may not
lead to improved profitability.
1 The wrong strategic priorities are emphasised.

If this happens, the performance measurement system may be directing employees to focus on areas that will not lead to the
achievement of the company's goals. For example, a firm may believe that high-quality innovative products are attributes that
customers value, and will design performance measures and targets that focus on product quality and product innovation. However, if
customers do not value quality and are unwilling to pay extra for this, and if they are perfectly satisfied with the standard range of
products, then the company may find that it is out of step with the market. The company has not understood what it is about their
products that customers value. The strategy of product quality and product innovation will not lead to improved profitability.
2 The failure to utilise freed-up resources.
Many improvements in areas such as productivity and quality effectively expand the productive capacity of the business. When cycle
time reduces, more units of product can be produced in a shorter time. When reject rates improve, fewer products are reworked and the
need for inspections may be reduced. This means that employees and equipment may be underutilised. (there is spare capacity).
Improvements will not translate into cost savings and improved profits unless the idle resources (equipment and employees) are used
in some other profitable activities or are disposed of. However, many of the resources that are freed up may be committed costs; for
example, it may be difficult to dispose of equipment or rationalise staff levels immediately. Also, it may be difficult, in the short term, to
increase sales demand, and hence production, to use the idle resources. Thus, improvements in a range of non-financial areas will
benefit a firm only if they can be translated into higher capacity utilisation, or cost reductions. Capacity management is explained in
more detail in Chapter 16.
3 A lag between non-financial and financial performance.
Sometimes an improvement in areas such as customer satisfaction and quality may not result in improved financial performance in the
same time period. For example, an improvement in quality in the March quarter may not result in improved sales for six months or
more, as it takes time for former customers to learn of the quality improvement and to recommence purchasing products from a
company.
4 Incentives to engage in dysfunctional behaviour.
The design of the performance measurement system can provide incentives to maximise performance in some areas of the business,
at the expense of other areas. In addition, the measures may be easy to manipulate and falsify, so that 'real' performance is not as high
as the measures indicate.
Difficulty: Hard
30. One of the limitations with the traditional accounting system is that it is common to measure current performance
against the previous year's performance, which is not an indicator that the business's performance is good enough.
TRUE
AACSB: Reflective
Difficulty: Easy
* The perspectives that are generally considered with the balanced scorecard are the same regardless of whether the
business is a profit or not-for-profit concern.
FALSE
AACSB: Reflective
Difficulty: Easy
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F. In production, the time taken to get materials and machinery ready for a run is termed set-up time.
TRUE
AACSB: Reflective
Difficulty: Easy
33. Some of the measures that can be used for measuring competitiveness include market ratios, capital structure and
liquidity.
FALSE
AACSB: Reflective
Difficulty: Medium
I. The Du Pont chart identifies linkages between key performance drivers, key performance indicators and financial
performance measures.
TRUE
AACSB: Reflective
Difficulty: Easy
35. Strategy maps are useful for explaining the cause-and-effect relationships that link business processes
and resources.
FALSE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.06 Outline the purpose of a strategy map
33. As customer expectations increase and stronger competition, organisations have to continually improve their
performance to retain their competitive position.
TRUE
AACSB: Reflective
Difficulty: Easy
Learning Objective: 14.11 Describe how continuous improvement can be built into a performance measurement system
F. Quality and customer satisfaction are non-financial measures that can be drivers of future financial performance.
TRUE
AACSB: Reflective
Difficulty: Easy
lOMoARcPSD|9693341
34. One way of setting up a system of continuous improvement is to utilise benchmarking for comparing products
functions and activities.
TRUE
AACSB: Reflective
Difficulty: Easy
F. One disadvantage of non-financial measures is their inability to drive future financial performance.
FALSE
AACSB: Reflective
Difficulty: Easy
80.
A criticism of non- financial measures it that over time a number of non-financial measures are replaced but the previous measure
continues to exist.
TRUE
AACSB: Reflective
Difficulty: Easy
lOMoARcPSD|9693341
lOMoARcPSD|9693341

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Chapter 12 Testbank Key

3. The biggest challenge in making a decentralised organisation function effectively is:

A. to earn maximum profits through fair

4. Which of the following is not a benefit of decentralisation?

A. Specialised information about the local

6. What is a negative consequence of decentralisation?

7. Which of the following statements is/are false?

8. Which of the following is not an example of a responsibility centre?

13. A sales department manager is an example of a:

14. An example of a profit centre is the:

A. pricing of goods as per market

Graduate Attribute: Problem Solving

23. Transfer prices should not be based on actual costs because:

Graduate Attribute: Problem Solving

Graduate Attribute: Problem Solving

Graduate Attribute: Problem Solving

Graduate Attribute: Problem Solving

Division A Division B Division C

A. low low low

Graduate Attribute: Problem Solving

41. Business unit profit and loss statements show:

42. A common cost is:

A. not easily related to any business unit's

A. its major business

50. The data in a performance report helps managers to:

A. consider ways of improving their

A. Actual business unit profit compared with budget business unit

A. Contribution of the business unit towards the

A. who has staff authority over

A. to reap the advantages of

62. Which of the following is a benefit of decentralisation?

63. In a divisional corporate organisation, an ideal inter-divisional transfer price should:

A. maximise the profits of the selling

64. What is the general rule for setting a transfer price?

A. Additional costs of the supplying division + opportunity cost to the buying

A. The negotiations can be extremely time-

A. It does not lead to optimal decisions for the

A. marginal cost transfer

A. Any costs that are attributable to the

A. Any costs that are attributable to the

78. A strategic business unit is:

79. Performance reports

Graduate Attribute: Communication

Learning Objective: 12-12 Understand the nature of service level agreements

common costs and variances

E. The return on investment can be defined as:

5. Calculate the return on investment of new equipment in the first year

E. The asset turnover of an organisation can be calculated as:

Calculate the asset turnover from the following data:

13. One of the disadvantages of return on investment is that:

E. The advantage of residual income as a measure of investment centre performance

E. Managers' performance in an investment centre can best be evaluated by:

Which of the following statements is false?

A pay system can include both cash and non-cash rewards.

21. Which of the following statements is false?

14. The profitability of an investment centre can best be evaluated by:

23. Which of the following statements is/are correct?

E. Which of the following is the correct mathematical expression for return on

The following information relates to Black's Mount Ltd:

What is its economic value added?

iv. Shareholder value added may be defined as: A.

E. Which of the following are, according to Herzberg, motivating factors?

23. Which of the following is/are, according to Herzberg, hygiene factors?