Question 1

A characteristic of an effective performance measure is that it yields maximum information about the decisions or actions of the individual or organizational unit.

Accepted Answer

An effective performance measure should provide relevant and useful information about the decisions or actions of the individual or organizational unit being evaluated.

Question 2

Decentralizing authority empowers employees at the higher levels.

Accepted Answer

Decentralizing authority empowers employees at lower levels by giving them more autonomy and decision-making power, not just those at higher levels.

Question 3

Cost centers for which there is a clear relation between inputs and outputs are termed discretionary cost centers.

Accepted Answer

Discretionary cost centers refer to cost centers where management has the discretion to incur or avoid expenditure. Examples include training and research departments, where the relation between inputs and outputs may not always be clear. Cost centers where there is a clear relation between inputs and outputs are known as engineered cost centers.

Question 4

Cost center managers serve two roles in organizations - achieving cost targets for a given level of output in the short term, and making continuous improvements to increase revenue in the long term.

Accepted Answer

The answer of Cost center managers serve two roles in...

Question 5

Organizations typically use budget variances to measure cost center performance in the long-run.

Accepted Answer

Budget variances are primarily used for short-term performance evaluation and control, allowing organizations to quickly identify and address deviations from the budget.

Question 6

The controllability principle is always the right approach for choosing performance measures.

Accepted Answer

While the controllability principle is a useful guideline for choosing performance measures, it is not always the right approach. Other factors, such as the relevance of the measure to organizational goals and the availability of data, should also be considered.

Question 7

Suma is a philosophy of continuous improvement that encourages and rewards employees who constantly seek and suggest improvements to activities and business processes.

Accepted Answer

Suma is not a recognized philosophy of continuous improvement; Kaizen is the correct term for the philosophy that encourages and rewards continuous improvement in business processes and activities.

Question 8

Most controllable measures are informative; however an informative measure is not necessarily controllable.

Accepted Answer

This statement is true. Controllable measures refer to actions or strategies that can be implemented to affect a particular outcome or result. Informative measures provide information about a specific variable or system, but do not necessarily provide direct control over that variable or system. Therefore, while most controllable measures are informative, not all informative measures are controllable.

Question 9

Organizations use monitoring, performance evaluation, and incentive schemes to manage the cost of delegating decisions.

Accepted Answer

Monitoring, performance evaluation, and incentive schemes are commonly used by organizations to manage the cost of delegated decisions by ensuring that the decisions made align with organizational goals and objectives, while also encouraging individuals to make decisions that are in line with the organization's best interests. These tools are effective in managing the risks associated with delegation by providing a system of checks and balances that help ensure that the delegated authority is being used appropriately.

Question 10

Firms often use profit before taxes to evaluate profits centers, computed as contribution margin less traceable fixed costs.

Accepted Answer

Profit before taxes is commonly used by firms to evaluate profit centers, and it is calculated as contribution margin minus traceable fixed costs.

Question 11

The major criticism against ROI is that it is not an effective summary measure of business profitability.

Accepted Answer

ROI (Return on Investment) is widely used and accepted as an effective measure of business profitability because it calculates the percentage return on a particular investment relative to its cost, providing a clear and concise summary of its financial performance. However, criticisms of ROI often focus on its potential to encourage short-term thinking or its inability to account for risk, rather than its effectiveness as a summary measure of profitability.

Question 12

Decentralization worsens the problem of divergence between individual and organizational goals by preventing lower-level managers from preparing to move to upper-level positions.

Accepted Answer

Decentralization often empowers lower-level managers by giving them more autonomy and decision-making authority, which can align their goals more closely with those of the organization and better prepare them for upper-level positions through hands-on experience.

Question 13

Managers of investment centers enjoy little autonomy in decentralized organizations.

Accepted Answer

Managers of investment centers in decentralized organizations typically have a significant amount of autonomy in decision making pertaining to their centers.

Question 14

Net book value is the original acquisition cost of plant and equipment less accumulated depreciation.

Accepted Answer

Net book value is calculated as the original cost of an asset less any accumulated depreciation.

Question 15

Cost center managers are charged with minimizing the cost of producing a specified level of output or the cost of delivering a specified level of service.

Accepted Answer

Cost center managers are responsible for managing and controlling the costs associated with their department or area of responsibility, with the goal of achieving efficient and effective operations while minimizing expenses.

Question 16

Residual income represents the additional profit or value generated by an investment after meeting the required rate of return.

Accepted Answer

Residual income is the profit or value generated by an investment after deducting the required rate of return from its income. It measures the performance of an investment beyond its expected performance.

Question 17

Normally, we exclude interest and taxes from the calculation of an investment center's profit results from its operations because profit center managers usually do not influence financial or tax-related decisions.

Accepted Answer

Interest and taxes are typically excluded from an investment center's profit calculations because these factors are often beyond the control of the managers responsible for the center's operational performance.

Question 18

Production managers have little control over the volume of production.

Accepted Answer

Production managers have a great deal of control over the volume of production. They can adjust production schedules, hire and fire workers, and purchase new equipment to increase or decrease output.

Question 19

A characteristic of an effective performance measure is that it is easy to understand and communicate.

Accepted Answer

An effective performance measure should be easily understandable and communicable to all stakeholders. This makes it easier to track progress and make informed decisions based on the data collected.

Question 20

Ensuring smooth succession is important for the survival of any company.

Accepted Answer

Smooth succession planning ensures that key positions are filled with competent and capable individuals, which is crucial for the continuity and growth of a company. It also ensures that there is a clear roadmap for leadership transitions and prevents any disruption or instability that may arise due to unexpected departures or retirements of key personnel.

Quiz 12: Performance Evaluation in Decentralized Organizations