CPAR
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
MAS 9706
MANAGEMENT ADVISORY SERVICES
MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES for
PERFORMANCE MEASUREMENT
RESPONSIBILITY ACCOUNTING
RESPONSIBILITY ACCOUNTING – a system of accounting wherein costs and revenues are
accumulated and reported by levels of responsibility or by responsibility centers within the
organization.
Responsibility center (also called accountability center)
–
a clearly identified part or segment of an organization that is accountable for a specified
function or set of activities.
any part of the organization that a particular manager is responsible for
–
TYPES OF RESPONSIBILITY CENTERS:
a. Cost Center (or expense center) – a segment of an organization in which managers are
held responsible for the costs or expenses incurred in the segment.
b. Revenue Center – where management is responsible primarily for revenues.
c. Profit Center – a segment of the organization in which the manager is held responsible for
both revenues and costs.
d. Investment Center – a segment of the organization where the manager controls revenues,
costs, and investments. The center’s performance is measured in terms of
the use of the assets as well as the revenues earned and the costs incurred.
CLASSIFICATIONS OF COSTS IN RESPONSIBILITY ACCOUNTING
1.
2.
3.
By responsibility center
By cost type, as to controllability
By specific cost items or cost elements within each classification in (1) and (2).
RESPONSIBILITY vs. ACCOUNTABILITY
Responsibility has two facets, (1) the obligation to secure results, and (2) the obligation to
report back the results achieved to higher authority.
Accountability denotes the obligation to report results achieved to higher authority.
THE CONCEPT OF DECENTRALIZATION
Decentralization refers to the separation or division of the organization into more manageable
units wherein each unit is managed by an individual who is given decision authority and held
accountable for his decisions.
•
•
Goal congruence – all members of an organization have incentives to perform for a common
interest.
Sub-optimization – occurs when one segment of a company takes action that is in its own best
interests, but is detrimental to the firm as a whole.
BENEFITS OF DECENTRALIZATION
1.
2.
3.
4.
5.
6.
7.
Better access to local information
Cognitive limitations
More timely response
Focusing of central management
Training and evaluation
Motivation
Enhanced competition.
COSTS OF DECENTRALIZATION
1. Some decisions made in one sub-unit may bring about negative effect to the other sub-units
or the organization as a whole.
2. Decentralization necessitates a more elaborate reporting system hence, the costs of
gathering and reporting of data increase.
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3. Job duplication or overlapping of functions is usually encountered in a decentralized set-up.
MEASURING THE PERFORMANCE OF INVESTMENT CENTERS
Performance measures for investment centers usually attempt to assess how well managers are
utilizing invested assets of the division to produce profits by relating operating profits to assets.
Return on investment (ROI) is the most common measure of performance for investment centers.
ROI can be defined as follows:
ROI =
Operating Income
Average Operating Assets
Operating income refers to earnings before interest and taxes. Operating assets include all assets
acquired to generate operating income, including cash, receivables, inventories, land, buildings, and
equipment.
The ROI formula can also be broken down into the product of margin and turnover. Margin is the
ratio of operating income to sales. Turnover is defined as sales divided by average operating
assets.
ROI =
Margin x Turnover
or
ROI =
Operating Income
Sales
x
Sales
Average Operating Assets
Three advantages of using ROI to evaluate the performance of investment centers:
1. It encourages managers to pay careful attention to the relationships among sales, expenses,
and investment, as should be the case for a manager of an investment center.
cost eff
2. It encourages cost efficiency.
3. It discourages excessive investment in operating assets.
excessinve OA
awareness
Two disadvantages of using ROI are:
1. It discourages managers from investing in projects that would decrease the divisional ROI
but would increase the profitability of the company as a whole. (Generally, projects with an
ROI less than a division’s current ROI would be rejected.)
2. It can encourage myopic behavior, in that managers may focus on the short run at the
expense of the long run.
Residual income (RI) - the difference between operating income and the minimum peso return
required on a company’s operating assets. The equation for RI can be
expressed as follows:
RI = Operating Income − (Minimum Rate of Return x Operating Assets)
ECONOMIC VALUE ADDED (EVA) – a more specific version of residual income. It represents the
segment’s true economic profit because it measures the benefit obtained by using resources
in a particular way.
After-tax operating income
(EBIT x [1 – Tax Rate])
Less desired income
(After-tax WACC* x [Total assets – Current liabilities])
Economic Value Added (EVA)
* WACC = Weighted average cost of capital
xx
xx
xx
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TRANSFER PRICING
TRANSFER PRICE – the monetary value or the price charged by one segment of a firm for the
goods and services it supplies to another segment of the same firm.
OBJECTIVES OF TRANSFER PRICING
1. To facilitate optimal decision-making.
2. To provide a basis in measuring divisional performance.
3. To motivate the different department heads in improving their performance and that of their
departments.
APPROACHES FOR DETERMINING TRANSFER PRICE:
1. Negotiated transfer price
2. Cost-based transfer price
3. Market-based transfer price
General Rules in Choosing a Transfer Price
•
•
•
The maximum price should be no greater than the lowest market price at which the
buying segment can acquire the goods or services externally.
The minimum price should be no less than the sum of the selling segment’s incremental
costs associated with the goods or services plus the opportunity cost of the facilities
used.
A good should be transferred internally whenever the minimum transfer price (set by
the selling division) is less than the maximum transfer price (set by the buying division).
By using this rule, total profits of the firm are not decreased by an internal transfer.
THE BALANCED SCORECARD: STRATEGIC-BASED CONTROL
The Balanced Scorecard is a strategic management system that defines a strategic-based
responsibility accounting system.
Strategy is defined as choosing the market and customer segments the business unit intends
to serve, identifying the critical internal and business processes that the unit must excel at to
deliver the value propositions to customers in the targeted market segments, and selecting the
individual and organizational capabilities required for the internal, customer, and financial
objectives.
The Balanced Scorecard translates an organization’s mission and strategy into operational
objectives and performance measures for four different perspectives: the financial
perspective, the customer perspective, the internal business process perspective, and the
learning and growth (infrastructure) perspective.
Common characteristics of balanced scorecards
a. It should be possible, by examining a company’s balanced scorecard, to infer its strategy and
the assumptions underlying that strategy.
b. The balanced scorecard should emphasize continuous improvement rather than just meeting
present standards or targets.
c. Some of the performance measures on the balanced scorecard should be non-financial.
d. The scorecards for individuals should contain only those performance measures they can
actually influence.
e. The ultimate objectives of the organization are usually financial, but better financial results
cannot be attained without improving customers’ perceptions of the company’s products and
services. In order to improve customers’ perceptions of products and services, it is usually
necessary to improve internal business processes so that the products and services are actually
better. And in order to improve the business processes, it is necessary that employees learn.
The balanced scorecard as a motivation and feedback mechanism. The performance
measures on the balanced scorecard provide motivation and feedback for improving.
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The Financial Perspective
The financial perspective establishes the long- and short-term financial performance
objectives. The financial perspective is concerned with the global financial consequences of
the other three perspectives. Thus, the objectives and measures of the other perspectives
must be linked to the financial objectives. The financial perspective has three strategic
themes: revenue growth, cost reduction, and asset utilization.
Customer Perspective
The customer perspective is the source of the revenue component for the financial
objectives. This perspective defines and selects the customer and market segments in which
the company chooses to compete.
Process Perspective
To provide the framework needed for this perspective, a process value chain is defined. The
process value chain is made up of three processes: the innovation process, the operations
process, and the post sales process.
Cycle time is the time required to produce one unit of product.
Velocity is the number of units that can be produced in a given period of time (e.g.,
units per hour).
Learning/Innovation and Growth Perspective
The learning and growth perspective is the source of the capabilities that enable the
accomplishment of the other three perspectives’ objectives.
SOME INTERNAL BUSINESS PROCESS PERFORMANCE MEASURES.
a. Delivery Cycle Time. This is the total elapsed time between when an order is placed by a
customer and when it is shipped to the customer. Part of this time is wait time that
occurs before the order is placed into production.
b. Throughput (Manufacturing Cycle) Time. This is the total elapsed time between when
an order is initiated into production and when it is shipped to the customer. It consists
of process time, inspection time, move time, and queue time. The only element that
adds value is processing time. Inspection time, move time, queue time, and their
associated activities do not add value and should be minimized.
c.
Manufacturing Cycle Efficiency (MCE). MCE is the ratio of value-added time (i.e.,
process time) to total throughput time. It represents the percentage of time an order is
in production in which useful work is being done. The rest of the time represents nonvalue-added time (i.e., inspection time, move time, and queue time).
Manufacturing Cycle Efficiency (MCE) can be found as follows:
MCE
=
Processing time
Processing time + Move Time + Inspection Time + Wait time
QUALITY COST MEASUREMENT:
Quality-linked activities are those activities performed because poor quality may or does exist.
Costs of quality are costs that exist because poor quality may or does exist.
Control activities are performed by an organization to prevent or detect poor quality. Control
costs are the costs of performing control activities. There are two broad categories of control
costs: prevention costs and appraisal costs. Prevention costs are incurred to prevent poor
quality in the products or services being produced. Appraisal costs are incurred to determine
whether products and services are conforming to their requirements or customer needs.
MANAGEMENT ACCOUNTING CONCEPTS and
TECHNIQUES for PERFORMANCE MEASUREMENT
MAS 9706
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Failure activities are performed by an organization or its customers in response to poor quality.
Failure costs are the costs incurred by an organization because failure activities are
performed. There are two broad categories of failure costs: internal failure costs and
external failure costs. Internal failure costs are incurred because products and services do
not conform to specifications or customer needs and the nonconformance is detected prior
to being delivered to outside parties. External failure costs are incurred because products
or services fail to conform to requirements or satisfy customer needs and the
nonconformance is detected after being delivered to outside parties.
PRODUCTIVITY MEASUREMENT
Productivity – measures the relationship between actual inputs used (both quantities and costs)
and actual outputs produced.
Partial productivity – compares the quantity of output produced with the quantity of an individual
input used.
Partial Productivity =
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑢𝑠𝑒𝑑
Total Factor Productivity – the ratio of quantity of output produced to the costs of all inputs used
based on current period prices.
Total factor productivity =
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
𝐶𝑜𝑠𝑡𝑠 𝑜𝑓 𝑎𝑙𝑙 𝑖𝑛𝑝𝑢𝑡𝑠 𝑢𝑠𝑒𝑑
EXERCISES:
1. A company provided the following income statement for last year.
Sales
Less: Variable expenses
Contribution margin
Less: Fixed expenses
Operating income
₱960,000
780,000
₱180,000
151,200
₱ 28,800
At the beginning of last year, the company had ₱156,800 in operating assets. At the end of
the year, it had ₱163,200 in operating assets.
REQUIRED:
1. Compute average operating assets.
2. Compute the margin and turnover ratios for last year. Compute ROI.
2. A company has two divisions – Division A and Division B. Selected data on the two divisions
follow:
DIVISION A
DIVISION B
Net operating income
₱ 864,000
₱ 252,000
Sales
10,800,000
3,600,000
Average operating assets
4,800,000
1,200,000
REQUIRED:
1. Assume that the company evaluates performance by use of residual
income and that the minimum required return for any division is 12%.
Compute the residual income for each division.
2. Is Division A’s greater amount of residual income an indication that it is
better managed? Explain
3. For each division, compute the return on investment (ROI) in terms of
margin and turnover.
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3. A company reported these data at year-end:
Income before tax
Current liabilities
Long term liabilities
Stockholders’ equity
₱ 80,000
32,000
160,000
288,000
The company pays income tax at the rate of 25% of income before tax. Its weighted
average cost of capital is 10%.
REQUIRED: Calculate the Economic Value Added (EVA).
4. A company’s Division A produced the following operating results in 2024:
Sales
Income
Assets
₱80,000
12,000
48,000
Division A is considering a ₱20,000 investment in a new project that is expected to
generate an ROI of 8%.
1. Compute Division A’s current ROI.
2. If the manager of the Division is evaluated on return on investment alone,
will the manager invest in the new project? Explain.
TRANSFER PRICING
5.
Carpet Division of Building Products Inc. manufactures a single grade of residential grade
carpeting. The division has the capacity to produce 500,000 square meters of carpet each
year. Its current costs and revenues are shown here:
Sales (400,000 square meters)
Variable costs per square meter:
Production
SG&A
₱2,000,000
₱2.00
1.00
Fixed costs per square meter (based on 500,000 meter capacity)
Production
₱0.50
SG&A
1.00
The Housing Division currently purchases 40,000 square meters of carpeting (of the grade
produced by the Carpet Division) each year at a cost of ₱6.50 per square meter from an
outside vendor.
REQUIRED:
a. If the autonomous Housing and Carpet Divisions enter negotiations on the internal
transfer of 40,000 square meters of carpeting, what is the maximum price that will be
considered?
b. If the autonomous Housing and Carpet Divisions enter negotiations on the internal
transfer of 40,000 square meters of carpeting, what is the Carpet Division’s minimum
price?
MANAGEMENT ACCOUNTING CONCEPTS and
TECHNIQUES for PERFORMANCE MEASUREMENT
MAS 9706
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c. If the Housing and Carpet Divisions agree on the internal transfer of 40,000 square
meters of carpet at a price of ₱4.50 per square meter, how will the profits of the Housing
Division be affected?
d. If the Housing and Carpet Divisions agree on the internal transfer of 40,000 square
meters of carpet at a price of ₱4.00 per square meter, how will overall corporate profits
be affected?
e. Assume, for this question only, that Carpet Division is producing and selling 500,000
square meters of carpet to external buyers at a price of ₱5 per square meter. What
would be the effect on overall corporate profits if Carpet Division reduces external sales
of carpet by 40,000 square meters and transfers the 40,000 square meters of carpet to
the Housing Division?
6.
A company’s Audio Division produces a speaker that is used by manufacturers of various
audio products. Sales and cost data on the speaker follow:
Selling price per unit on the intermediate market
Variable costs per unit
Fixed costs
Capacity in units
₱100
₱ 60
₱300,000
20,000
The company has a TV Division that could use this speaker in one of its products. The TV
Division will need 2,000 speakers per year. It has received a quote of ₱90 per speaker
from another manufacturer. The company evaluates division managers on the basis of
divisional profits.
Required:
1. Assume that the Audio Division is now selling only 15,000 speakers per year to
outside customers.
a. From the standpoint of the Audio Division, what is the lowest acceptable
transfer price for speakers sold to the TV Division? ₱60
b. From the standpoint of the TV Division, what is the highest acceptable transfer
price for speakers acquired from the Audio Division? ₱90
c. If left free to negotiate without interference, would you expect the division
managers to voluntarily agree to the transfer of 2,000 speakers from the Audio
Division to the TV Division? Why or why not? Yes, as long as the TP is within
the TP Range of ₱60 to ₱90
d. From the standpoint of the entire company, should the transfer take place?
Why or why not? Yes. Cost to produce is ₱60 only, cost to buy is ₱90
2. Assume that the Audio Division is selling all of the speakers that in can produce to
outside customers.
a. From the standpoint of the Audio Division, what is the lowest acceptable
transfer price for speakers sold to the TV Division?
₱60 + ₱40 CM to be lost = ₱100.
b. From the standpoint of the TV Division, what is the highest acceptable transfer
price for speakers acquired from the Audio Division? ₱90
c. If left free to negotiate without interference, would you expect the division
managers to voluntarily agree to the transfer of 2,000 speakers from the Audio
Division to the TV Division? Why or why not? No. Abnormal Range – Minimum
of ₱100, maximum of ₱90
d. From the standpoint of the entire company, should the transfer take place?
Why or why not? No. The company will give up ₱100 and save ₱90, or a loss
of ₱10 per unit.
7. GreenThumb, Inc., is a nursery products firm. It has three divisions that grow and sell
plants: the Western Division, the Southern Division, and the Central Division.
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Recently, the Southern Division of GreenThumb acquired a plastics factory that
manufactures green plastic pots. These pots can be sold both externally and internally.
Company policy permits each manager to decide whether to buy or sell internally. Each
divisional manager is evaluated on the basis of return on investment and EVA.
The Western Division had bought its plastic pots in lots of 100 from a variety of vendors.
The average price paid was ₱100 per box of 100 pots. However, the acquisition made Nay
Sy, manager of the Western Division, wonder whether a more favorable price could be
arranged. She decided to approach Flint, manager of the Southern Division, to see if he
wanted to offer a better price for an internal transfer. She suggested a transfer of 3,000
boxes at ₱95 per box.
Flint gathered the following information regarding the cost of a box of 100 pots:
Direct materials
Direct labor
Variable overhead
Fixed overhead*
Total unit cost
₱48
12
10
14
₱84
Selling price
₱100
Production capacity 25,000 boxes
*Fixed overhead is based on ₱350,000/25,000 boxes.
REQUIRED:
1. Suppose that the plastics factory is producing at capacity and can sell all that it
produces to outside customers. How should Flint respond to Nay’s request for a lower
transfer price?
2. Now assume that the plastics factory is currently selling 20,000 boxes. What are the
minimum and maximum transfer prices? Should Flint consider the transfer at P95 per
box? Minimum of ₱70, maximum of ₱100. Flint should agree to transfer at ₱95.
3. Suppose that GreenWorld’s policy is that all transfer prices be set at full cost plus 20
percent. Would the transfer take place? Why or why not? TP = ₱84 x 1.20 = ₱100.80.
No transfer would take place. ₱100.80 is higher than the outside price of ₱100.
8. Balanced scorecards contain a number of factors that are important to the success of a
business. These factors are often divided into four categories: financial, customer, learning
and growth, and internal operations or internal business process.
Consider the factors that follow.
L&G a.
b.
F
CUST c.
IBP d.
L&G e.
IBP f.
IBP g.
CUST h.
F
i.
IBP j.
CUST k.
IBP l.
CUST m.
Employee turnover
Cash flow from operations
Number of customer complaints
Unfavorable standard cost variances
Hours of in-house training per employee
Defect-free units as a percentage of completed units
Time from call by customer to repair of product
Number of new customers
Gross profit
Setup time
Product returns as a percentage of sales
On-time deliveries as a percentage of all deliveries
Market share
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CUST n. Customer satisfaction as measured by survey results
L&G o. Suggestions per employee
IBP p. Time to introduce new products to market
CUST q. Percentage of customers retained from last period
REQUIRED:
Determine the proper classification (financial, customer, learning and growth, or
internal business process) for each of the factors listed.
9. The following information for a recent project was taken from the records of a company:
Waiting time from order receipt until start of production
Processing time
Inspection time
Move time
Queue time
2 days
12 days
4 days
1 days
3 days
NON VALUE ADDING
VALUE ADDING
NON VALUE
NON VALUE
NON VALUE
Required:
a.
b.
c.
d.
e.
What is the delivery cycle time? 22
What is the delivery cycle efficiency? VALUE ADDING DIVIDE TOTAL DELIV CYCLE
What is the throughput (manufacturing cycle time)? TOTAL TIME LESS WAITING TIMW
What is the manufacturing cycle efficiency? 12 DIVIDE 20
As judged by the manufacturing cycle efficiency, what percentage of the overall
production time was spent on (1) value-adding activities and (2) non-value adding
activities?
60% and 40%
10. A company manufactures a product in batches of 20 units. The following information
pertains to operations during a certain month.
Average per batch:
Processing time
Inspection time
Waiting time
Move time
REQUIRED:
24 hours
4 hours
10 hours
2 hours
40 hours
Compute the following operational measures:
1. average value-added time per batch 24
2. average nonvalue- added time per batch 16
3. manufacturing cycle efficiency 24/40 = 60%
4. manufacturing cycle time
5. velocity. 2
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12. A company has identified the following as having an impact on the company's
quality costs:
1. Downtime due to defects in quality
2. Evaluation of suppliers
3. Depreciation of test equipment
4. Systems development
5. Reliability testing
6. Product liability
7. Quality engineering/design
8. Inspection of manufactured goods on assembly line
9. Rework labor and overhead
10. Customer complaints
11. Warranty repairs
12. Supervision of testing and inspection
13. Rework of defective goods before transfer
to finished goods
14. Net cost of scrap
15. Preventive maintenance for equipment
16. Warranty replacements
17. Units repaired at customers' site
18. Quality improvement projects
19. Product testing
20. Employee training
REQUIRED:
Classify the given costs as prevention, appraisal, internal failure, or external failure.
13. During 2024 and 2025, a company reported sales of ₱6,000,000 per year. The company
listed the following quality costs for the past two years. Assume that all changes in the
quality costs are due to a quality-improvement program.
Design review
Recalls
Reinspection
Materials inspection
Quality training
Process acceptance
Scrap
Lost sales (estimated)
Product inspection
Returned goods
Total
2024
₱ 150,000
200,000
100,000
60,000
40,000
—
145,000
300,000
50,000
155,000
₱1,200,000
2025
₱ 300,000
100,000
50,000
40,000
100,000
50,000
35,000
200,000
30,000
95,000
₱1,000,000
REQUIRED:
1. Prepare a quality cost report for each year (2024 and 2025). What does this report
tell management?
2. Calculate the relative distribution of quality costs by category for each year. What
message does this communicate to management?
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TECHNIQUES for PERFORMANCE MEASUREMENT Page 11 of 15
2024
PREVENTION COSTS:
Design review
Quality training
Total
₱150,000
40,000
₱190,000
APPRAISAL COSTS:
Materials inspection
Process acceptance
Product inspection
Total
₱ 60,000
0
50,000
₱110,000
INTERNAL FAILURE COSTS:
Reinspection
Scrap
Total
₱100,000
145,000
₱245,000
EXTERNAL FAILURE COSTS:
Recalls
Lost sales
Returned goods
Total
TOTAL QUALITY COSTS
2025
3.17%
₱300,000
100,000
₱400,000
6.67%
1.83%
₱ 40,000
50,000
30,000
₱120,000
2%
4.08%
₱50,000
35,000
₱85,000
1.42%
₱200,000
300,000
155,000
₱655,000
10.92%
₱100,000
200,000
95,000
₱395,000
6.58%
₱1,200,000
20.00%
₱1,000,000 16.67%
The quality cost report communicates two major outcomes:
1.
The total quality costs as a percentage of sales is quite high – 20%, indicating
there are significant opportunities to improve quality and reduce quality costs.
2.
Most of the quality costs are failure costs and more investment in control costs are
needed.
PERCENTAGE OF TOTAL QUALITY COSTS (Distribution of quality costs by category):
2024
2025
Prevention
16%
40%
Appraisal
9%
12%
Internal failure
20%
9%
External failure
55%
40%
In 2024, the control costs are 25% and the failure costs are 75% of total quality costs.
From 2024 to 2025, the company significantly increased its investment in control costs.
SELF-TEST:
RESPONSIBILITY ACCOUNTING & TRANSFER PRICING
1. Belle, Inc. uses an accounting system that charges costs to the manager who has been
delegated the authority to make decisions incurring the costs. For example, if the sales
manager accepts a rush order that will result in higher-than-normal manufacturing costs,
these additional costs are charged to the sales manager because the authority to accept
or decline the rush order was given to the sales manager. This type of accounting system
is known as
a. responsibility accounting.
c. reciprocal allocation.
b. functional accounting.
d. transfer price accounting.
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TECHNIQUES for PERFORMANCE MEASUREMENT Page 12 of 15
2. In responsibility accounting, a center’s performance is measured by controllable costs.
Controllable costs are best described as including
a. direct material and direct labor only.
b. only those costs that the manager can influence in the current time period.
c. only discretionary costs.
d. those costs about which the manager is knowledgeable and informed.
3. A segment of an organization is referred to as a service center if it has
a. responsibility for developing markets and selling the output of the organization.
b. responsibility for combining the raw materials, direct labor, and other factors of
production into a final output.
c. authority to make decisions affecting the major determinants of profit including the
power to choose its markets and sources of supply.
d. authority to provide specialized support to other units within the organization.
4. The basic purpose of a responsibility accounting system is
a. budgeting
c. authority.
b. motivation.
d. variance analysis.
5. A successful responsibility accounting reporting system is dependent upon
a. the correct allocation of controllable variable costs.
b. identification of the management level at which all costs are controllable.
c. the proper delegation of responsibility and authority.
d. a reasonable separation of costs into their fixed and variable components since fixed
costs are not controllable and must be eliminated from the responsibility report.
6. Which one of the following statements pertaining to the return on investment (ROI) as a
performance measurement is incorrect?
a. When the average age of assets differs substantially across segments of a business,
the use of ROI may not be appropriate.
b. ROI relies on financial measures that are capable of being independently verified,
while other forms of performance measures are subject to manipulation.
c. The use of ROI may lead managers to reject capital investment projects that can
be justified by using discounted cash flow models.
d. The use of ROI can make it undesirable for a skillful manager to take on troubleshooting assignments such as those involving turning around unprofitable divisions.
7. Yuri’s Service Co. is a service center. For the month of June, Yuri had the following
operating statistics:
Sales
P750,000
Operating income
25,000
Net profit after taxes
8,000
Total assets available
500,000
Shareholders’ equity
200,000
Cost of capital
6%
Yuri has a
a. return on investment of 3.33%.
c. return on investment of 6%.
b. residual income of P(5,000).
d. residual income of P(20,000).
8. Listed below is selected financial information for the Northern Division of Hanziel Company
for last year:
Account
Average working capital
General and administrative expenses
Net sales
Average plant and equipment
Cost of goods sold
Amount (in thousands)
P 625
75
4,000
1,775
3,525
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TECHNIQUES for PERFORMANCE MEASUREMENT Page 13 of 15
If Hanziel treats the Northern Division as an Investment Center for performance
measurement purposes, what is the before-tax return on investment (ROI) for last year?
a. 34.78%
c. 19.79%
b. 22.54%
d. 16.67%
9. Apple is the general manager of the Industrial Product Division, and his performance is
measured using the residual income method. Apple is reviewing the following forecasted
information for his division for next year:
Category
Amount (in thousands)
Working capital
Revenue
Plant and equipment
P 1,800
30,000
17,200
If the imputed interest charge is 15% and Apple wants to achieve a residual income target
of P2,000,000, what will costs have to be in order to achieve the target?
a. P 9,000,000
c. P25,150,000
b. P10,800,000
d. P25,690,000
10. Vicky Co. is a computer service center. For the month of May, Vicky had the following
operating statistics:
Sales
Operating income
Net profit after taxes
Total assets
Shareholders’ equity
Cost of capital
P450,000
25,000
8,000
500,000
200,000
6%
Based on the above information, which one of the following statements is correct? Vicky
has a
a. return on investment of 4%.
b. residual income of P(5,000).
11.
c. return on investment of 1.6%.
d. residual income of P(22,000).
The price that one division of a company charges another division for goods or services
provided is called the
a. market price.
c. outlay price.
b. transfer price.
d. distress price.
12. The most fundamental responsibility center affected by the use of market-based transfer
prices is a(n)
a. production center.
c. cost center.
b. investment center.
d. profit center.
13. Transfer price should encourage goal congruence and managerial effort. In a
decentralized organization, it should also encourage autonomous decision-making.
Managerial effort is
a. the desire and the commitment to achieve a specific goal.
b. the sharing of goals by supervisors and subordinates.
c. the extent to which individuals have the authority to make decisions.
d. the extent of the attempt to accomplish a specific goal.
14. Goal congruence is
a. the desire and the commitment to achieve a specific goal.
b. the sharing of goals by supervisors and subordinates.
c. the extent to which individuals have the authority to make decisions.
d. the extent of the attempt to accomplish a specific goal.
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15. Motivation is
a. the desire and the commitment to achieve a specific goal.
b. the sharing of goals by supervisors and subordinates.
c. the extent to which individuals have the authority to make decisions.
d. the extent of the attempt to accomplish a specific goal.
16. In theory, the optimal method for establishing a transfer price is
a. flexible budget cost.
c. budgeted cost with or without
mark-up.
b. incremental cost.
d. market price.
17. An appropriate transfer price between two divisions of GMA Company can be determined
from the following data:
Fabricating Division
Market price of sub-assembly
Variable cost of sub-assembly
Excess capacity (in units)
P50
P20
1,000
Assembling Division
Number of units needed
900
What is the natural bargaining range for the two divisions?
a. Between P20 and P50
c. Any amount less than P50.
b. Between P50 and P70
d. P50 is the only acceptable price.
Items 18 to 20 are based on the following information:
River Park, Inc. has several divisions that operate as decentralized profit centers. River
Park’s Entertainment Division manufactures video arcade equipment using the products
of two of River Park’s other divisions. The Plastics Division manufactures plastic
components, one type that is made exclusively for the Entertainment Division, while other
less complex components are sold to outside markets. The products of the Video Cards
Division are sold in a competitive market; however, one video card model is also used by
the Entertainment Division.
The actual costs per unit used by the Entertainment Division are presented below:
Direct materials
Direct labor
Variable overhead
Fixed overhead
Total cost
Plastic Components
Video Cards
P1.25
2.35
1.00
0.40
P5.00
P2.40
3.00
1.50
2.25
P9.15
The Plastics Division sells its commercial products at full cost plus a 25% markup and
believes the proprietary plastic component made for the Entertainment Division would sell
for P6.25 per unit on the open market. The market price of the video card used by the
Entertainment Division is P10.98 per unit.
18. A per-unit transfer price from the Video Cards Division to the Entertainment Division at
full cost, P9.15, would
a. allow evaluation of both divisions on a competitive basis.
b. satisfy the Video Cards Division’s profit desire by allowing recovery of opportunity
costs.
c. provide no profit incentive for the Video Cards Division to control or reduce costs.
d. encourage the Entertainment Division to purchase video cards from an outside
source.
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19. Assume that the Entertainment Division is able to purchase a large quantity of video cards
from an outside source at P8.70 per unit. The Video Cards Division, having excess
capacity, agrees to lower its transfer price to P8.70 per unit. This action would
a. optimize the profit goals of the Entertainment Division while subverting the profit
goals of River Park, Inc.
b. allow evaluation of both divisions on the same basis.
c. subvert the profit goals of the Video Cards Division while optimizing the profit goals
of the Entertainment Division.
d. optimize the overall profit goals of River Park, Inc.
20. Assume that the Plastics Division has excess capacity and it has negotiated a transfer
price of P5.60 per plastic component with the Entertainment Division. This price will
a. cause the Plastics Division to reduce the number of commercial plastic components
it manufactures.
b. motivate both divisions as estimated profits are shared.
c. encourage the Entertainment Division to seek an outside source for plastic
components.
d. demotivate the Plastics Division causing mediocre performance.
1. A
2. B
3. D
4. B
5. C
6. B
7. B
8. D
9. C
10. B
11. B
12. D
13. D
14. B
15. A
16. D
17. A
18. C
19. D
20. B
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