PRTC USJR performance measure and the balanced scorecard 102016

Answer Section

MULTIPLE CHOICE

1. ANS: D
2. ANS: A
3. ANS: D
4. ANS: A
5. ANS: C
6. ANS: C
7. ANS: C
8. ANS: C
9. ANS: C
10. ANS: C
11. ANS: B
12. ANS: B
13. ANS: C
14. ANS: B
15. ANS: C
16. ANS: B
17. ANS: D
18. ANS: C
19. ANS: D
20. ANS: C
21. ANS: D
22. ANS: C
23. ANS: C
24. ANS: B
ROI = Profit Margin ´ Asset Turnover
.20 = PM ´ 5
PM = ROI/Asset Turnover
PM = .04 or 4%
25. ANS: D
26. ANS: A
Segment Income = ROI * BV of Total Assets
= 0.15 * P1,000,000
= P150,000
27. ANS: D
Net Income - (Target Rate ´ Asset Base) = Residual Income
P150,000 - (Target Rate ´ P1,000,000) = P100,000
(Target Rate ´ P1,000,000) = P50,000
Target Rate = 5.0%
28. ANS: B
P50,000 / 0.15 = P333,333
29. ANS: A

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30. ANS: D
EVA = After Tax Net Income - (Cost of Capital ´ Market Value of Assets)
EVA = ((P2,000,000 * .25) ´ .60) - (.10 ´ P3,600,000)
EVA = P(300,000 - 360,000)
EVA = P(60,000)
31. ANS: C
Net Income - (Target Rate of Return ´ Total assets) = Residual Income
P500,000 - (Target Rate of Return * P2,000,000) = P200,000
Target Rate of Return * P2,000,000 = P300,000
Target Rate of Return = 15%
32. ANS: D
P100,000 * .25 = P25,000
33. ANS: A
0.20 - 0.15 = 0.05 residual income
P10,000 / 0.05 = P200,000
34. ANS: D
(ROI ´ Total Assets) - (Target Rate ´ Total Assets) = Residual Income
(ROI ´ P1,000,000) - (0.12 ´ P1,000,000) = P150,000
(ROI ´ P1,000,000) = P270,000
ROI = 27%
35. ANS: C
P15,000/0.10 = P150,000
36. ANS: C
Residual Income = P(10,000,000 - 7,500,000) - ((.16) * P6,000,000)
= P(2,500,000 - 960,000)
=P1,540,000
37. ANS: C
ROI = Net Income/Average Total Assets
= P(2,500,000/6,000,000)
= 41.67%
38. ANS: D
(Net Income) - (Target Rate ´ Total Assets) = Residual Income
(P5,000,000) - (0.20 ´ Total Assets) = P2,000,000
(0.20 ´ Total Assets) = P3,000,000
Total Assets = P15,000,000
ROI = (5,000,000/15,000,000)
ROI = 33%
39. ANS: B
40. ANS: D
41. ANS: D
42. ANS: D
43. ANS: B
44. ANS: C
45. ANS: D
46. ANS: A
47. ANS: A
48. ANS: B
49. ANS: D
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 50. ANS: C
51. ANS: C
52. ANS: D
53. ANS: B
54. ANS: B
55. ANS: A
´ ´ = 1. units

56. ANS: C
= 80%

57. ANS: C
= 80%

58. ANS: B
´ ´ = 500 units

59. ANS: D
= 833 units
60. ANS: B
61. ANS: C
62. ANS: A
63. ANS: B
64. ANS: C
65. ANS: D
66. ANS: A
67. ANS: A
68. ANS: B
69. ANS: B
70. ANS: A

SHORT ANSWER

71. ANS:
a. The purpose of EVA is to more directly align the interests of common shareholders and
managers.
b. EVA = A/Tax profit - (market value of invested capital ´ cost of capital %).
c. EVA uses after-tax profit, cost of capital and market value of assets invested. RI uses
segment income, target rate of return and book value of assets invested.
d. Because it recognizes that there may be a significant difference between book value and
market value of assets. The market value of a company is reflected in stock prices which
are another measure of performance evaluation.
e. EVA includes the increased investment immediately even though significant income may
not occur until sometime in the future. Most investments will show decreased short-term
performance (EVA) and may cause a company to refuse projects that are profitable in the
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 long-term (similar to shortcomings of the payback method).
72. ANS:
a. Each measure is based on accounting income which can be manipulated in the short-term by
accounting methods used, which can differ between investment centers.
b. The measurement of the asset base is affected by the choice of what to include, and may
include items that relate to decisions made by prior managers.
c. All measures focus primarily on how well the segments do in isolation with results compared
to prior years for the same segment, rather than relative company-wide objectives.
73. ANS:
The advantage of ROI measure over RI is that ROI facilitates a comparison of organizational sub-units of differing
sizes. Because ROI is a performance measure that automatically scales for size, large and small sub-units can be
compared to each other (subject to all the factors that should be considered when two units in different industries,
different geographical areas, etc. are compared).
74. ANS:
Because performance measures are used to reward performance, managers use them as decision criteria when they
evaluate alternative courses of action. For example, if ROI is the performance criterion, a division manager will
only invest in new projects that will result in an increase in his/her division's ROI. This is sub-optimal if the overall
organization would be better off by the division manager's investment in available projects with lower ROIs.
75. ANS:
Residual income is the remainder of net profit once a target cost of capital has been taken into consideration.
Residual income is determined by deducting from net income a prescribed or imputed interest charge on assets.
This method allows an organization to use different rates of interest for various organizational assets. A main
advantage of using RI is that it overcomes some limitations of ROI (sub-optimization).
76. ANS:
Net income and investment involved can both be calculated several ways. Multiple calculations are often presented
to show the different factors that affect ROI, changes in sales, expenses, and capital investments.
77. ANS:
1. The measures should be established to assess progress toward the organizational
mission and its related goals and objectives.
2. The persons being evaluated should be aware of the measurements used and have
some input in developing them.
3. The persons being evaluated should have the appropriate skills, equipment,
information, and authority to be successful under the measurement system.
4. Feedback of accomplishment should be provided in a timely and useful manner.
5. The system should be flexible to adapt to new conditions in the organizational
environment.
78. ANS:
Answers will vary on this. The major advantages are listed below:

Compared to financial measures, nonfinancial performance measures are more:

• relevant to nonmanagement employees who are generally more familiar with nonfinancial items
(such as times and quantities) than financial items (such as costs or profits)
• timely than historical financial data and, thus, more apt to indicate where problems lie or where
benefits can be obtained
• reflective of the leading indicators of activities that create shareholder wealth, such as
manufacturing and delivering quality goods and services and providing service for the customer
• causative of goal-congruent behavior (rather than suboptimization) because they promote
long-term success rather than the short-term success promoted by financial measures
• integrated with organizational effectiveness because they can be designed to focus on
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 processes rather than simply outputs
• indicative of productive activity and the direction of future cash flows
• appropriate for gauging teamwork because they can focus on outputs that result from
organizational effort (such as quality) rather than inputs (such as costs)
• cross functional than financial measures, which are generally related to one function
• comparable for benchmarking externally than financial measures (which can be dramatically
affected by differences in accounting methods)
• aligned with the reward system because they are more likely to be under the control of
lower-level employees than are financial measures
79. ANS:
Skilled production workers à Process quality à Customer loyalty à Return on investment
80. ANS:
Strategic technology availability à Design and develop new products à Market share à Grow revenues
81. ANS:
a. Best-tel’s strategy is one of product innovation and leadership because the company plans to offer a product
that is superior and unique from the competition.

The company’s Balanced Scorecard should describe the product innovation and leadership strategy. Key
elements should include:

b. operating income growth from charging higher prices for TT502 for the financial perspective;
c. market share in the cellular phone market, customer satisfaction, and number of new customers for the
customer perspective;
d. manufacturing quality, new product features added, and order delivery time for the process
perspective; and
e. Improvements in manufacturing technologies, employee education and skill levels, and employee
satisfaction for the learning and growth perspective.
82. ANS:
a. ABM’s strategy is one of lowest total cost because there are a number of other manufacturers who produce
similar novelty cups. To succeed, ABM will have to achieve lower costs relative to competitors
through productivity and efficiency improvements, elimination of waste, and tight cost controls.

The company’s Balanced Scorecard should describe the lowest total cost strategy. Key elements should
include:

b. operating income growth from productivity gains and revenue growth for the financial perspective;
c. growth in market share, new customers, customer responsiveness, and customer satisfaction for the
customer perspective;
d. yield, time to complete customer jobs, and order delivery time for the process perspective; and
e. hours of employee training, and employee satisfaction for the learning and growth perspective.
83. ANS:
The primary purpose of the Balanced Scorecard is to translate an organization’s vision, mission, and strategy into a
set of performance measures that put that strategy into action with clearly-stated objectives, measures and target.
84. ANS:
The Balanced Scorecard translates an organization’s strategy into a set of performance measures that put that
strategy into action with clearly-stated objectives, whereas the key performance indicator scorecard does not link
the performance indicators to a strategy. The Balanced Scorecard is more effective because it links to the
performance measures to a company’s strategy.

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PROBLEM

85. ANS:
a. Sales P9,000,000
Variable costs (3,650,000)
Direct fixed costs (4,770,000)
Segment margin P 580,000

Average assets = (P3,600,000 + P5,300,000) / 2 = P4,450,000

b. Profit margin = P580,000 / P9,000,000 = 6.44%

Asset turnover = P9,000,000 / P4,450,000 = 2.02
ROI = P580,000 / P4,450,000 = 13%
c. The target ROI for the division was 2.5 ´ 6 = 15%. The division generated an ROI of only
13%. Thus the division did not achieve its target rate of return. The poor performance
resulted from the divisions failure to achieve its targeted asset turnover.
d. RI = P580,000 - (13% ´ P4,450,000)
= P580,000 - P578,500 = P1500
e. After-tax profits = pretax income - taxes
= P580,000 - (P580,000 ´ 40%) = P348,000
EVA = P348,000 - (P8,000,000 ´ 10%) = P(452,000)
EVA and RI differ for three reasons. First, RI is based on pre-tax rather than after-tax
income. Second, RI is based on the book value of investment, whereas EVA is based on
the market value of investment. Third, the target rates of return differ between the
methods.
f. ROI, RI and EVA are measures of short-term performance. These measures may be
particularly inappropriate for divisions that have long-term missions (such as high
growth). In this case, the relatively large growth and assets of IFS from the beginning of
the period to the end of the period may indicate this division is oriented to growth. If so,
the ROI, RI and EVA measures will provide an incentive contrary to the growth mission.
86. ANS:
a. Defective units = 6,000,000 - 4,800,000 = 1,200,000
b. MCE = 600 ( 800 = 75%
c. Process productivity = 6,000,000 ( 600 = 10,000 units per hour
d. Process quality yield = 4,800,000 ( 6,000,000 = 80%
e. Throughput = 10,000 ´ .75 ´ .8 = 6,000 dolls per hour