Performance Measurement To Support Business Strategy: True / False Questions

Chapter 18
Performance Measurement to Support Business Strategy

True / False Questions

1. One reason financial measures are used to evaluate performance is that they are easily quantifiable.

True False

2. One disadvantage of using nonfinancial measures to evaluate performance is that they are only available on
a monthly, quarterly, or annual basis.

True False

3. One question that an organization's mission statement should answer is how the organization will evaluate
its performance relative to its competitors.

True False

4. In general, all managers in a given organization are responsible for the same things and should be evaluated
using the same financial and nonfinancial measures.

True False

5. In general, performance measures—financial and nonfinancial—should relate to what managers at different
levels control.

True False

6. A business model is a description of how different levels and employees in the organization must perform
for the organization to achieve its goals and objectives.

True False

7. In general, the use of multiple measures to evaluate performance is better than the use of a single
performance measure.

True False

8. At the middle levels in the organization, control and performance measurement focus on how people carry
out the daily activities that create the organization's products.

True False

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McGraw-Hill Education.
9. At the upper level of the organization, performance measurement focuses on whether the organization is
meeting its responsibilities and performing well from the stakeholders' perspective.

True False

10. A balanced scorecard is basically a balance sheet prepared using nonfinancial measures.

True False

11. The concept of a balanced scorecard is to measure how well the organization is doing from the view of
employees, suppliers, customers, business partners, and the community, as well as the shareholders.

True False

12. A balanced scorecard uses only nonfinancial measures to determine how well the organization is doing in
view of competing stakeholder concerns.

True False

13. Continuous improvement involves the search for and implementation of the best way to do something as
practiced by other organizations or in other parts of one's own organization.

True False

14. One of the important guidelines of benchmarking is to not benchmark everything at the best-in-the-business
level; no organization can be the best at everything.

True False

15. The primary objective of benchmarking is to evaluate performance of an activity, operation, or organization
relative to the performance by other companies.

True False

16. Manufacturing cycle time is the total time involved in processing, moving, storing, and inspecting a good
or providing a service.

True False

17. Improving the efficiency of the manufacturing cycle involves decreasing the time spent processing a good.

True False

18. The number of defective units is an example of a subjective performance measure.

True False

19. Partial productivity is the ratio of the value of output to the value of all key inputs.

True False

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20. One advantage of nonfinancial measures is that managers directly involved in operations are likely to
understand them.

True False

21. Employee involvement in setting performance objectives is likely to increase the employee's commitment
to the organization.

True False

22. Employees empowered with real decision-making authority are more likely to be more responsive to
customer concerns.

True False

Multiple Choice Questions

23. ___________ is a firm's ability to generate products or services that are perceived by its customers as being
superior and unique as opposed to those offered by its competitors.

A. Strategy
B. Product differentiation
C. Cost leadership
D. The balanced scorecard

24. ________ is a firm's ability to implement low costs compared to its competitors with productivity
improvements, increased efficiency, reduction of waste, and the use of cost control.

A. Strategy
C. Cost leadership

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25. Which of the following statements is(are) true regarding financial measures?
(A) One disadvantage of using financial measures to evaluate performance is that they are typically
reported on a monthly, quarterly, or annual basis.
(B) One reason financial measures are used to evaluate performance is that they are easily quantifiable.

A. Only A is true.
B. Only B is true.
C. Both A and B are true.
D. Neither A nor B is true.

26. A description of an organization's values, definition of its responsibilities to stakeholders, and identification
of its major strategies is called its:

A. business-level strategy.
B. mission statement.
C. performance objectives.
D. master budget.

27. Which of the following nonfinancial measures would not be used to evaluate a middle manager's
performance?

A. Frequency of meeting customer delivery requirements.

B. Amount of unwanted employee turnover.
C. Success in dealing with suppliers.
D. Fulfilling responsibilities to company shareholders.

28. A balanced scorecard shows measures of performance as they related to areas of performance. Which of the
following is a measure of performance of customer value?

A. Gross margin ratio.

B. Retention of existing customers.
C. Hours of job related training.
D. Process cycle time.

29. Which of the following is not one of the four areas of strategic action on a balanced scorecard?

A. Business and production process performance.

B. Customer satisfaction measurement.
C. Financial performance.
D. Customer performance.

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30. Which of the following best describes the customer performance area of the balanced scorecard?

A. Indicates how the infrastructure for innovation and long-term growth should contribute to a company's
strategic goals.
B. Indicates how a customer oriented strategy adds financial value.
C. Indicates how areas of the company should work to add value to customers.
D. Measures the company's success in adding value to shareholders.

31. A business model attempts to minimize problems associated with:

A. decentralization.
B. divisional autonomy.
C. goal congruence.
D. maximizing profits.

32. Which of the following statements is(are) false regarding financial measures?
(A) In general, the use of multiple measures to evaluate performance is better than the use of a single
(B) Managers evaluated using multiple measures will most likely act differently than managers evaluated
using single measures.

A. Only A is false.
B. Only B is false.
C. Both A and B are false.
D. Neither A nor B is false.

33. A balanced scorecard is a set of:

A. performance measures.
B. financial statements.
C. budget schedules.
D. annual reports.

34. In general, a balanced scorecard is used to evaluate an organization's performance using:

A. standard costs and variance analysis.

B. multiple financial and nonfinancial measures.
C. financial statements and ratio analysis.
D. the Board of Director's audit committee.

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35. One of the results in using balanced scorecards is a shift from a focus on financial results to a focus on:

A. maximizing market share.

B. minimizing budgetary slack.
C. eliminating fraudulent behavior.
D. increasing customer satisfaction.

36. Which of the following balanced scorecard perspectives focuses on quality and process improvement?

A. Financial.
B. Customer.
C. Internal Business Process.
D. Learning and growth.

37. Which of the following balanced scorecard perspectives focuses on customer service issues?

A. Financial.
B. Customer.

38. Which of the following balanced scorecard perspectives focuses on shareholder's interests?

A. Financial.
B. Customer.

39. Which of the following balanced scorecard perspectives focuses on employee development?

A. Financial.
B. Customer.

40. In the balanced scorecard, the financial perspective addresses which of the following questions?

A. "To achieve our mission, how will we sustain our ability to change and improve?"
B. "To succeed financially, how should we appear to our shareholders?"
C. "To satisfy our shareholders and customers, in what business process must we excel?"
D. "To achieve our mission, how should we appear to our customers?"

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41. In the balanced scorecard, the internal business process perspective addresses which of the following
questions?


42. In the balanced scorecard, the learning and growth perspective addresses which of the following questions?

43. In the balanced scorecard, the customer perspective addresses which of the following questions?


44. The balanced scorecard measures an organization's performance in all of the following areas except:

A. financial.
B. government.
C. customer.
D. learning and growth.

45. ________ communicates an organization's strategy into an inclusive set of performance measures that
provide the structure for implementing that strategy.

A. Productivity component
C. Cost leadership

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46. The first step to the successful implementation of a balanced scorecard is specifying the:

A. organization's vision and strategy.

B. elements that pertain to value-added aspects of the business.
C. owner's expectations about return on investment.
D. objectives of all four balanced scorecard measurement perspectives.

47. Which of the following represents value-added time in the manufacturing cycle?

A. Inspection Time.
B. Storage Time.
C. Move Time.
D. Process Time.

48. Manufacturing Cycle Efficiency (MCE) is computed as:

A. Processing Time × Manufacturing Cycle Time.

B. Processing Time ÷ Inspection Time.
C. Processing Time ÷ Manufacturing Cycle Time.
D. Moving Time ÷ Storage Time.


A. Inspection time.
B. Storing time.
C. Moving time.
D. Processing time.

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50. Mountainburg Corporation keeps careful track of the time required to fill orders. The times recorded for a
particular order appear below:
Hours
Processing Time 1.2
Inspection Time 0.3
Moving Time 3.8
Storing Time 4.2
The manufacturing cycle time was:

A. 5.3 hours.
B. 20.7 hours.
C. 15.4 hours.
D. 9.5 hours.

51. Travis Corporation keeps careful track of the time required to fill orders. The times recorded for a

Hours
Processing Time 0.7
Inspection Time 0.3
Moving Time 2.9
Storing Time 8.7
The manufacturing cycle efficiency (MCE) was closest to:

A. 0.73.
B. 0.06.
C. 0.15.
D. 0.02.

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52. Steinwand Corporation keeps careful track of the time required to fill orders. Data concerning a particular
order appear below:

Hours
Processing Time 1.9
Inspection Time 0.2
Moving Time 2.8
Storing Time 7.2
The Manufacturing Cycle time was:

A. 20.3 hours.
B. 25.2 hours.
C. 4.9 hours.
D. 12.1 hours.

53. Steinwand Corporation keeps careful track of the time required to fill orders. Data concerning a particular
order appear below:

Hours
Processing Time 1.9
Inspection Time 0.2
Moving Time 2.8
Storing Time 7.2

A. 0.24.
B. 0.16.
C. 0.92.
D. 0.08.

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54. Morgenstern Corporation keeps careful track of the time required to fill orders. The times recorded for a

Hours
Processing Time 1.6
Inspection Time 0.1
Moving Time 2.6
Storing Time 7.2

A. 4.3 hours.
B. 31.6 hours.
C. 27.3 hours.
D. 11.5 hours.

Hours
Processing Time 1.6
Inspection Time 0.1
Moving Time 2.6
Storing Time 7.2

A. 0.05.
B. 0.57.
C. 0.14.
D. 0.16.

56. Which of the following items is not part of the continuous improvement philosophy?

A. Eliminate activities that are nonvalue-added.

B. Improve the efficiency of activities that are value-added.
C. Use benchmarking to identify activities that need improvement.
D. Provide bonus incentives to managers for accurate performance reports.

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57. Benchmarks are used to evaluate the performance of an activity or operation relative to other organizations
or other parts of one's own organization. Which of the following is not a guideline for using benchmarks to
evaluate performance?

A. Benchmarks should only be used for nonfinancial measures.

B. Do not benchmark everything at the best-in-the-business level.
C. Benchmark only best-in-the-business activities that are important.
D. Use internal benchmarks for less important activities or operations.

58. Which of the following statements is(are) false?
(A) Internal, regional, and local benchmarks should be used for the most important processes and activities
in an organization.
(B) In general, the use of multiple measures to evaluate performance is better than the use of a single

A. Only A is false.
B. Only B is false.

59. Which of the following is typically not considered an objective of quality control?

A. Reduce costs associated with customer complaints.

B. Reduce costs of honoring product or service warranty.
C. Increase customer satisfaction with product or service.
D. Increase the number of deliveries made when promised.

60. Functional performance measures differ from customer satisfaction performance measures in that they are
used primarily to evaluate:

A. internal processes.
B. external processes.
C. benchmark processes.
D. continuous improvement processes.

61. Manufacturing cycle efficiency is computed by dividing process time by:

A. moving time + storage time.

B. storage time + inspection time.
C. moving time + storage time + inspection time.
D. process time + moving time + storage time + inspection time.

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62. Which of the following statements is(are) true regarding performance measures?
(A) In general, objective performance measures are better than subjective performance measures.
(B) In general, the use of multiple performance measures is better than the use of single performance
measures.

A. Only A is true.
B. Only B is true.

63. An objective performance measure is one where:

A. different people will agree as to the appropriateness of a measure.

B. different people will agree as to the method to calculate the measure.
C. different managers will calculate a measure differently.
D. different managers will view the facts and come to different conclusion.

64. A subjective performance measure is one where:


C. different managers will calculate a measure the same.

65. Which of the following is not a mistake often made when measuring nonfinancial performance?

A. Using subjective rather than objective measures.

B. Not linking measure to strategy.
C. Not validating links between activities and strategies.
D. Not setting appropriate performance targets.

66. Which of the following performance measures would be used to evaluate the personnel department
performance?

A. Number of product recalls.

B. Percentage of late deliveries.
C. Number of requests for transfers.
D. Length of time to fill vacant positions.

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67. Partial productivity measures are most closely related to what type of variances?

A. Price variances.
B. Sales mix variances.
C. Efficiency variances.
D. Production volume variances.

68. Total factor productivity:

A. is a ratio of the value of output to the value of all key inputs.
B. is the same thing as the production volume variance.
C. focuses on an individual input.
D. includes materials and labor but not overhead.

69. If a manager wants to assess performance relative to the industry, it is best to use:

A. partial productivity measures.

B. production volume variances.
C. sales price variances.
D. total factor productivity.

70. Partial productivity:


71. Which of the following is not a partial productivity measure?

A. tons output/tons of material used.

B. sales value/total cost.
C. gallons output/direct labor hour.
D. units produced/machine hour.

72. Which of the following is a total factor productivity measure?

A. Tons output/tons of material used.

B. Units produced/machine hour.
C. Sales value/total cost.
D. Gallons output/direct labor hour.

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73. The Otero Manufacturing Company collected the following information (in days):

April
Transporting product 2.0
Processing product 14.0
Inspecting product 0.5
Storing product 6.0
What is the manufacturing cycle efficiency?

A. 87.5%.
B. 63.6%.
C. 62.2%.
D. 42.9%.


April
Storing product 6.0
What is the manufacturing cycle time?

A. 14.0 days.
B. 16.0 days.
C. 22.0 days.
D. 22.5 days.

75. The Malcolm Company collected the following information (in days):

Manufacturing product 20.0
Storing product 8.0

A. 28.6%.
B. 64.5%.
C. 71.4%.
D. 90.9%.

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76. The Malcom Company collected the following information (in days):

Storing product 8.0

A. 10 days.
B. 31 days.
C. 28 days.
D. 22 days.

77. The Majors Company collected the following information (in days):
Inspecting product 4
Transporting product 6
Storing product 15
Manufacturing product 40

A. 61.5%.
B. 72.7%.
C. 87.0%.
D. 27.3%.

Storing product 15

A. 21 days.
B. 65 days.
C. 55 days.
D. 46 days.

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79. The Falisari Company collected the following information (in days):

Storing product 20

A. 100.0%.
B. 82.2%.
C. 63.1%.
D. 76.5%.

Storing product 20

A. 65 days.
B. 34 days.
C. 103 days.
D. 85 days.

81. The Ramos Company collected the following information (in days):

Storing product 6.0

A. 87.5%.
B. 82.4%.
C. 70.9%.
D. 17.6%.

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Storing product 6.0

A. 39.5 days.
B. 34.0 days.
C. 32.0 days.
D. 10.0 days.

83. The Boxwood Machining Co. has the following information for last year:
Tons of metal input 28,000

Labor hours 10,000
Overhead costs $125,000
Tons of output produced 20,000
The partial productivity for metal is:

A. 2.800.
B. 1.400.
C. 0.714.
D. 0.526.


Labor hours 10,000
The partial productivity for labor is:

A. 2.800.
B. 2.000.
C. 0.526.
D. 0.500.

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85. The California Machining Co. has the following information for last year:
Feet of metal input 150,000

Labor hours 12,000

A. 0.040.
B. 0.080.
C. 12.500.
D. 25.000.


Labor hours 12,000

A. 12.500.
B. 2.000.
C. 0.500.
D. 0.120.

87. The White Hot Mining Co. has the following information for last year:

Labor hours 12,000

A. 1.000.
B. 0.069.
C. 14.58.
D. 12.00.

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88. The Trundle Pass Mining Co. has the following information for last year:
Labor hours 112,000

Tons of output produced 1,575,000

A. 1.120.
B. 0.071.
C. 14.06.
D. 112.00.

89. The Cave Springs Milling Co. has the following information for last year:

Material input 13,112,000
Yards of output produced 1,575,000
The partial productivity for materials is

A. 0.12
B. 1.31
C. 8.33
D. 15.75

90. The Alma Milling Co. has the following information for last year:

The partial productivity for materials is:

A. 0.131.
B. 0.191.
C. 0.686.
D. 5.236.

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91. The Fort Smith Co. has the following information for last year:

Labor hours 112,000
The partial productivity for material is:

A. 1.136.
B. 0.288.
C. 0.263.
D. 3.802.


Labor hours 112,000

A. 0.097.
B. 0.256.
C. 3.906.
D. 10.313.

93. Tungsten Forging Co. has provided the following information for last year:

Tons of metal input 10,000 @ $10/ton
Labor hours 5,000 @ $30/hour
Tons of forging @ selling price of
8,000
produced $60/ton
The total factor productivity measure is:

A. $480,000.
B. $375,000.
C. 1.28.
D. 0.78.

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94. Toomey Toolworks Co. has provided the following information for last year:

16,000
produced $75/ton

A. 1.231.
B. 1.600.
C. 2.167.
D. 3.250.

95. Prancing Products has provided the following information for last year:
Gallons input 10,000 @ $15/gallon

Gallons finished 8,000 @ selling price of $55/gallon

A. 1.25.
B. 1.60.
C. 15.63.
D. 1.17.

96. Sojourn Enterprises has provided the following information for last year:
Material costs $225,000

Labor hours $85,000
Product produced 32,000 @ selling price of $22/each

A. 1.003.
B. 1.134.
C. 0.882.
D. 0.362.

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97. Premier Products Co. has provided the following information for last year:

Labor hours $45,000

A. $150,000.
B. $312,000.
C. 1.154.
D. 0.832.

98. Moonlight Co. has provided the following information for last year:

Labor costs $90,000
Product produced 16,000 units
Total factor productivity 1,154
The selling price of the product (rounded) is:

A. $45.01.
B. $33.80.
C. $39.00.
D. $28.13.

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99. Magnum Co. has provided the following information for last year:

Gallons input $20,000 @ $15/gallon
Labor costs ???
@ selling price of
Gallons finished 16,000
$55/gallon
Total factor
1.1733
productivity
The total labor cost (rounded) is:

A. $293,325.
B. $482,500.
C. $468,750.
D. $200,021.

100. Walters Co. has provided the following information for last year:
Gallons input ???

Labor costs 10,000 @ $20/hr
@ selling price of
$55/gallon
Total factor
1.1733
productivity
The total material cost (rounded) is:

A. $293,325.
B. $582,500.
C. $300,021.
D. $200,000.

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101. Harringer Co. has provided the following information for last year:

Overhead costs ???
@ selling price of
$55/gallon
Total factor
1.0732
productivity
The total overhead cost (rounded) is:

A. $172,200.
B. $109,989.
C. $140,000.
D. $200,000.

102. Cavanaugh Co. has provided the following information for last year:
Gallons input ??? @ $20/gallon

@ selling price of
$55/gallon
Total factor
1.0732
productivity
The total number of gallons input (rounded) is:

A. 10,000 gallons.
B. 8,600 gallons.
C. 7,450 gallons.
D. 200,000 gallons.

103. Employee involvement is important in an effective performance measurement system because it:

A. increases the employee's commitment to the organization and its objectives.

B. decreases the employee's reliance on financial performance measures.
C. increases the likelihood that goal congruence problems will occur.
D. decreases the chances of an unfavorable manufacturing cycle time.

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104. Which of the following is not a difficulty in implementing nonfinancial performance measurement
systems?

A. Fixation on financial measures.

B. Reliability of the nonfinancial measures.
C. Nonfinancial measures decrease goal congruence.
D. Lack of correlation between nonfinancial measures and financial results.

Essay Questions

105. The Miller Manufacturing Company collected the following information (in days) for April and May.

April May
Transporting product 2.0 3.0
Processing product 14.0 16.0
Inspecting product 0.5 0.8
Storing product 8.0 5.0
Required:
a. Calculate the manufacturing cycle efficiency for April and May.

b. Calculate the processing time required for May so that May's manufacturing cycle efficiency is equal to
April's manufacturing cycle efficiency.

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106. The Satin Manufacturing Company collected the following information (in days) for July and August.

July August
Required:
a. Calculate the manufacturing cycle efficiency for July and August.

b. Assume September's processing time will be the same as August's. If Satin's target for manufacturing
cycle efficiency is 65%, what will be September's target for manufacturing cycle time?

107. The Gantry Company collected the following information (in days) for November and December.

November December
Required:
a. Calculate the manufacturing cycle efficiency for November and December.

b. Assume January's processing time will be the same as December's. If Gantry's target for manufacturing
cycle efficiency is 65%, what will be January's target for non-processing times?

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April May
Required:

b. Calculate the processing time required for May so that May's manufacturing cycle efficiency is equal to
April's manufacturing cycle efficiency.


July August
Required:


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November December
Required:


111. The Everton Manufacturing Company collected the following information (in days):

April May June
Transporting product 2.0 3.0 2.0
Processing product 5.0 7.0 7.0
Inspecting product 0.5 0.8 1.0
Storing product 2.0 3.0 4.0
Required:
a. Calculate the manufacturing cycle efficiency for April, May, and June.
b. Calculate the processing time required for June so that the manufacturing cycle efficiency is equal to the
most efficient of the previous two months.

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112. The Altoona Manufacturing Company collected the following information (in days) for July, August, and
September:

July August September
Required:
a. Calculate the manufacturing cycle efficiency for July, August, and September.
b. Assume October's processing time will be the same as September's. If Altoona's target for
manufacturing cycle efficiency is 65%, what will be October's target for manufacturing cycle time?

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113. The Gantry Company collected the following information (in days) for October, November, and
December:

October November December
Required:
a. Calculate the manufacturing cycle efficiency for October, November, and December.

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114. Marion Forging Co. has provided the following information for last year:

Labor hours 5,000
Tons of forging produced 10,000
Required:
Calculate the partial productivity for:
a. Metal.
b. Labor.


10,000
produced $60/ton
Required:
Calculate the total factor productivity measure.

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116. Pantipazole Products Co. has provided the following information for last year:

Labor hours $45,000
8,000
produced $45/each
Required:

117. Shuster Metalworks Co. has provided the following information for last year:

Pounds of metal input 21,000
Labor hours 8,000
Pounds of output produced 12,000
Required:
a. Metal.
b. Labor.

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Pounds of metal input 21,000 @ $12/pound

Pounds of output @ selling price of
12,000
produced $70/pound
Required:

119. Cummings Co. has provided the following information for last year:

Labor costs $70,000
Required:

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120. Maeve Co. has provided the following information for last year:

Pounds of input 35,000
Labor hours 8,000
Units of output produced 15,000
Required:
a. Metal.
b. Labor.

121. Colbyville Co. has provided the following information for last year:

Pounds of input 35,000 @ $17/pound
Units of output @ selling price of
15,000
produced $85/unit
Required:

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122. Beach Co. has provided the following information for last year:

Labor costs $62,000
Required:

123. Melbourne, Inc. has provided the following information for last year:

33,000
produced $85/unit
Required:
a. Metal.
b. Labor.

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124. Melbourne Inc., has provided the following information for last year:

33,000
produced $60/unit
Required:

125. Indiatlantic Corporation's management keeps track of the time it takes to process orders. During the most
recent month, the following average times were recorded per order:

Hours
Processing Time 1.1
Inspection Time 0.4
Moving Time 0.8
Storing Time 4.8
Required:
a. Compute the manufacturing cycle time.

b. Compute the manufacturing cycle efficiency (MCE).
c. What percentage of the production time is spent in non-value-added activities?

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126. During the most recent month at Harrison Corporation, storing time was 3.0 days, inspection time was 0.8
day, processing time was 2.8 days, and moving time was 0.6 day.
Required:
a. Compute the Manufacturing Cycle time.


127. Michael Corporation's management reports that its average manufacturing cycle time is 6.3 days, its
manufacturing cycle efficiency (MCE) is 0.27, its average move time is 0.1 day, and its average storage
time is 3.9 days.
Required:
a. What is the process time?

b. What is the inspection time?

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128. Karin Corporation keeps careful track of the time required to fill orders. The times required for a particular
order appear below:

Hours
Processing Time 0.6
Inspection Time 0.3
Moving Time 2.1
Storing Time 8.4
Required:
a. Determine the Manufacturing Cycle time. Show your work!

b. Determine the manufacturing cycle efficiency (MCE). Show your work!

129. Consider the following management activities:
• Choose the organization's long-term strategy.

• Plan and organize the use of resources into efficient operations.
• Implement plans and organizational change.
• Measure and report results.
• Define the organization's scale and scope of operations.
Required:
(a) Identify the sequence in which the decisions must be carried out. Why is it important to carry out these
activities sequentially?
(b) How can an effective cost management system support the above activities?

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130. Consider a local coffee shop, a Starbucks store, and a retail gas station that offers fresh coffee in its
convenience stores.
Required:
Characterize these stores according to the Porter strategy framework.

131. Studebaker Corporation, one of the earliest auto manufacturers, prospered in the late 1940's and into the
1950's. Its advertising after World War II emphasized quality of design and production. The corporation
also used the stability of its work force in its advertisements, often featuring pictures of father and son
working side by side in its factories.
Required:
A. From just this brief description of Studebaker Corporation, which type of competitive strategy—cost
leadership or differentiation—would you guess Studebaker was using? Explain your choice.
B. Given your answer in Part (A), speculate on what market factors might have caused the corporation to
go into bankruptcy and cease production in the mid-1960s.

18-40
132. Describe the difference between a company's mission statement and its business-level strategy.

133. Levis Strauss and Co., maker of Levi's familiar 501 and 505 brands of jeans, also make a "Signature" brand
that was introduced several years ago for discount retailers such as Wal-Mart. Levi's strategy with the new
jeans was to sell a competitively priced pair. The jeans were to be about one-half the price of the familiar
501 and 505 jeans. To get costs down Levi's would:
• Use cheaper fabrics and materials.

• Shun costly mass-market advertising.
• Strictly limit the number of fits, styles, and colors.
The Signature brand had a good first year of sales; assume that results for the second year and later are not
yet in.
Required:
1. Assess the new strategy at Levi. What do you think are the potential benefits and risks?
2. How will the firm's value chain and balanced scorecard change as a result of the new strategy?

18-41
134. For each of the following jobs, identify a possible nonfinancial performance measure.
(a) Computer help desk worker at your university.

(b) Dental hygienist
(c) Airline gate agent
(d) City bus driver

135. What is a business model?

136. Explain how producing more units than can be sold can increase operating income. Would this be an issue
in a service company or is it only an issue in a manufacturing environment? Could a company employ this
strategy indefinitely to show continuous increases in profits?

18-42
137. Indicate how the following concepts are used in the preparation of a balanced scorecard. Provide
examples where appropriate.
(a) Leading indicators.

(b) Lagging indicators.
(c) Customer value.
(d) Causal model.

138. Describe the four common perspectives that are used in the balanced scorecard.

18-43
139. Sam Almasi, the CEO of Almasi Technologies Inc. (ATI), a biotechnology firm had recently returned from
a conference on modern cost management and performance measurement methods where he was exposed
to target costing, value-chain analysis, balanced scorecard, activity-based management, and other ideas.
ATI is a five-year old company operating in a growing, but competitive market. It develops and produces
a number of different enzymes for use by research scientists and pharmaceutical companies. Its main
competitors are also small to medium sized firms just like ATI. The key to growth in this industry is the
ability to develop new products in a short time. Gail Stevenson, the vice-president (VP) for research &
development (R&D) has noticed that some of ATI's new developments did not perform well because of the
delays in their introduction into the market. Stevenson is very keen on hiring the best scientists and
ensuring that they stay current in their fields because knowledge is the key competitive weapon in the
biotechnology industry.
Bob Phillips, the controller of ATI had another concern. He has been noticing that the new products were
not only delayed but their actual development costs were usually higher than budgeted. One of his goals
was to see that the new products were profitable for the company.
Linda Joseph, the production manager, had a different concern of her own. Based on her observation, the
production of the new enzymes was taking longer. Her feeling was that the products spent too much time
in the quality control (QC) department. Barry Laker, the manager of the QC department argued that the
new enzymes lacked the rigorous specifications that are demanded in the marketplace. Consequently, the
QC department has to perform additional tests to get to the root cause of the problems.
Almasi had heard complaints from all quarters, and decided to convene a meeting of all the department
heads.
Almasi: Good afternoon, everyone. I am troubled that despite hiring a number of talented scientists, we
are unable to compete effectively in the marketplace. Many of the recent entrants in the game seem to be
beating us easily.
Stevenson: Sam, the key to our growth is rapid introduction of new products. Although my scientists are
developing new enzymes in record times, they seem to be getting held up in manufacturing and especially
the QC department.
Laker: Sam, I think I can pinpoint the root cause of the problem. I agree that our scientists are developing
new enzymes in record times, but they do not seem to be paying any attention to standards. It looks like my
department will have to provide training to them regarding quality control matters.
Stevenson: With due respect, I do not think there is more to know about QC standards. It looks like the
department wants more attention and is therefore creating all this unnecessary fuss.
Joseph: I think I will agree with Barry that there are problems at the R&D side. My production scientists
are also complaining that adequate specifications have not been developed; they have to constantly phone
their R&D counterparts for clarifications.
Stevenson: I do not believe that the production problems can be attributed to R&D. I have personally
screened each and every scientist during the hiring process.
Phillips: I don't think we will make much progress as a company if we keep pointing fingers at one
another. We all must realize that all problems, regardless of their origin, finally affect the bottom-line of
our company. Unless we set aside our differences and work together as a team, we will be unable to
compete with our rivals. Some of our competitors follow best practices, which we must try to emulate.
Almasi: I agree with Bob. We must all look for solutions. I recently attended a conference where noted
speakers talked about the value-chain of a company, interrelationships between functions, and the balanced
scorecard. In fact, some speakers suggested that companies must stop discussing in terms of individual
functions or departments; instead they must talk in terms of processes and understand linkages among all
the processes that exist in an organization. I believe there are a number of ideas that we could adopt. I will
leave the conference proceedings in the library, and suggest that we all read about these different topics.
How about getting together after six weeks and discussing a plan of action? Thank you and see you all
18-44
after six weeks.
Required:
Assume the role of a consultant preparing a report for ATI. Discuss the following aspects in your report:
The internal value-chain of ATI.

The balanced scorecard. Identify the goals of the company under each perspective of the scorecard and
cause-effect relationships, and develop potential measures that could be used.
How the inter-departmental differences can be eliminated.

18-45
140. David Palmer, manager of the Paper Products Division of a Graham Corporation, is a strong believer of
outcome measures. During one of his management meetings, he impressed upon his management team that
financial measures are the most important, and that his managers should only focus on improving those
measures.
Nina Meyers, a recent CMA who was at the meeting filling in for her superior, was not too impressed with
Palmer's exclusive focus on financial measures. As the meeting was about to end, she nervously pointed
out to Palmer that his focus on outcome measures could be detrimental to the performance of the company.
Meyers: Excuse me, Mr. Palmer, but I think it is wrong to place exclusive emphasis on financial outcome
measures. Instead, the emphasis must be on what are known as lead indicators, which provide information
about the likely outcome of managerial decisions.
Palmer: I commend you for your knowledge on recent developments. However, I have more than 20
years' experience in this field and I think I know what I am doing. After all, ultimately financial results are
what we want.
Meyers: I do not dispute that the ultimate result may largely be the financial returns to our shareholders.
However, unless we pay attention to the drivers of the results, we will not understand the problems that
exist in our processes. I can bring you up to date on a new performance measurement system known as the
Balanced Scorecard if you like.
Although Palmer was not too impressed at being challenged, he instructed Meyers to write him a report on
the Balanced Scorecard.
Required:
Prepare a brief report on the Balanced Scorecard with particular emphasis on the following aspects:
• What are leading and lagging indicators?

• Why are leading indicators important?
• What is the relationship between leading and lagging indicators (cause-effect relationships)?
• What are the different dimensions of the Balanced Scorecard?
• What are some examples of indicators pertaining to the different dimensions of the Scorecard?

18-46
141. Granite Manufacturing produces high-end furniture products for the luxury hotel industry. Granite has
succeeded through excellence in design, careful attention to quality in manufacturing, and in customer
service, and through continuous product innovation. The manufacturing process at Granite begins with a
close consultation with each customer so that the finished product exactly meets the customer's
specifications. This commonly means unique designs, special fabrics, and high levels of manufacturing
quality. In addition, Granite believes that a key competitive edge it has over other competitors is that it has
an outstanding design staff that is able to work with customers to come up with product designs that go
beyond the customer's expectations.
Required:
Present a balanced scorecard for Granite Manufacturing with 3-4 perspectives and 3-4 quantitative critical
success factors in each perspective.

142. Jackie Horner started Glad Rags to combine fashion and sustainability. The original production of sandals
made from recycled plastic has expanded to a complete line of casual footwear. Current sales total over $2
million. Jackie hired the firm's first controller early this year, and has asked him to detail suggestions for
ways to increase profits. Thomas Roberts, the new controller, has compiled a list of recommended changes
that focus on quality improvements. Glad Rags' customers expect high quality at a low price, a "value"
product. So the company must simultaneously watch costs and quality. After receiving his list of
suggestions, Jackie calls Thomas to her office and says, "I don't see how improving quality can increase
productivity. In fact, it seems to me that efforts to improve quality will slow down production and decrease
productivity."
Required:
Using specific examples, help Thomas explain to Jackie why efforts to improve quality can also boost
productivity. How does productivity play a role in the firm's strategy and competitive environment?

18-47
143. What is the difference between continuous improvement and benchmarking?

144. Dr. Hal Trotter is the director of the Wellness House, a residential center for recovering alcoholics. A
typical patient spends 3-4 weeks in an intensive program of rehabilitation. The Wellness House has a staff
of 45, including 12 certified therapists, to serve an average patient load of 15. Hal Trotter is attempting to
develop some productivity measures for the center, but is not aware of the limitations of productivity
measurement in not-for-profit organizations. You have been called in as a consultant to help develop
appropriate productivity measures.
Required:
(a) Identify any major differences/limitations you face in developing performance measures for the
Wellness House. (b) Recommend two or three overall measures of productivity that are appropriate for the
Wellness House as a not-for-profit organization.

18-48
145. Divisional managers of Crusing Incorporated have been expressing growing dissatisfaction with the current
methods used to measure divisional performance. Divisional operations are evaluated every quarter by
comparison with the static budget prepared during the prior year. Divisional managers claim that many
factors are completely out of their control but are included in this comparison. This results in an unfair and
misleading performance evaluation. The managers have been particularly critical of the process used to
establish standards and budgets. The annual budget, stated by quarters, is prepared six months prior to the
beginning of the operating year. Pressure by top management to reflect increased earnings has often caused
divisional managers to overstate revenues and/or understate expenses. In addition, once the budget had
been established, divisions were required to "live with the budget." Frequently, external factors such as the
state of the economy, changes in consumer preferences, and actions of competitors have not been
adequately recognized in the budget parameters that top management supplied to the divisions. The
credibility of the performance review is curtailed when the budget cannot be adjusted to incorporate these
changes. Top management, recognizing the current problems, has agreed to establish a committee to
review the situation and to make recommendations for a new performance evaluation system. The
committee consists of each division manager, the Corporate Controller, and the Executive Vice President
who serves as the chairman. At the first meeting, one division manager outlined an Achievement of
Objectives System (AOS). In this performance evaluation system, divisional managers would be evaluated
according to three criteria:
• Doing better than last year - Various measures would be compared to the same measures of the prior
year.
• Planning realistically - Actual performance for the current year would be compared to realistic plans
and/or goals.
• Managing current assets - Various measures would be used to evaluate the divisional management's
achievements and reactions to changing business and economic conditions.
A division manager believed this system would overcome many of the inconsistencies of the current
system because divisions could be evaluated from three different viewpoints. In addition, managers would
have the opportunity to show how they would react and account for changes in uncontrollable external
factors. A second division manager was also in favor of the proposed AOS. However, he cautioned that the
success of a new performance evaluation system would be limited unless it had the complete support of top
management. Further, this support should be visible within all divisions. He believed that the committee
should recommend some procedures which would enhance the motivational and competitive spirit of the
divisions.
Required:
(1) Explain whether or not the proposed AOS would be an improvement over the measure of divisional
performance now used by Crusing Incorporated. (2) Develop specific performance measures for each of
the three criteria in the proposed AOS which could be used to evaluate divisional managers. (3) Discuss the
motivational and behavioral aspects of the proposed performance system. Also, recommend specific
programs which could be instituted to promote morale and give incentives to divisional management.

18-49

146. Companies are continuously seeking ways to improve quality of production and reduce costs. One of the
areas is to work with suppliers to improve the quality and reliability of parts and products shipped. In an
article entitled "In Defense of Activity-Based Cost Management," Robert S. Kaplan says:
An ABC model can play a major role in improving supplier relationships as well. These relationships must
be a vital part of any quality and cycle-time improvement program. A key insight is to use ABC to
distinguish between low-price and low-cost suppliers. Traditional cost accounting, with its emphasis on
purchase price variances, encourages purchasing people to continually scan the population of potential
suppliers to obtain low price quotations. Most companies have learned, the hard way, that many of their
low-price suppliers are actually extremely high-cost suppliers. (Source: Management Accounting:
November, 1992)
Required:
(a) Explain what Kaplan means by "many of their low-price suppliers are actually extremely high-cost
suppliers."
(b)What general prevention and appraisal activities can be used to improve the quality and reliability of
parts and products shipped from suppliers?

147. What is productivity, and what are the differences between partial productivity measures and total factor
productivity?

18-50
148. Explain how nonfinancial performance measures for customer satisfaction may differ from functional
performance measures.

149. Why is worker involvement important to an organization's success?

150. At some manufacturing companies, line employees are allowed to stop the line or halt production if they
think there is a problem occurring. In other word, if units begin to be processed that are outside of
specifications.
Required:
Discuss the advantages and disadvantage of this employee empowerment policy.

18-51
Chapter 18 Performance Measurement to Support Business Strategy Answer
Key
True / False Questions

1. One reason financial measures are used to evaluate performance is that they are easily quantifiable.

TRUE
Financial measures by definition are quantitative.

AACSB: Analytical Thinking
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-01 Explain why management accountants should know the business strategy of their organization.
Topic: Beyond the Accounting Numbers 2

2. One disadvantage of using nonfinancial measures to evaluate performance is that they are only available
on a monthly, quarterly, or annual basis.

FALSE
They are available in shorter time periods or in real-time.

Blooms: Remember
Difficulty: 1 Easy

3. One question that an organization's mission statement should answer is how the organization will
evaluate its performance relative to its competitors.

FALSE
A mission statement describes internal values and responsibilities.

18-52
Blooms: Remember
Difficulty: 1 Easy

4. In general, all managers in a given organization are responsible for the same things and should be
evaluated using the same financial and nonfinancial measures.

FALSE
Managers are responsible for diverse operations and need specialized measures.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-02 Explain why companies use nonfinancial performance measures.
Topic: Responsibilities According to Level of Organization 3

5. In general, performance measures—financial and nonfinancial—should relate to what managers at
different levels control.

TRUE
Managers should be measured on what they can control.

Blooms: Remember
Difficulty: 1 Easy

6. A business model is a description of how different levels and employees in the organization must
perform for the organization to achieve its goals and objectives.

TRUE
This is the definition of a business model.

Blooms: Understand
Difficulty: 1 Easy
Topic: Business Model 3

18-53
7. In general, the use of multiple measures to evaluate performance is better than the use of a single

TRUE
Single measures can only reflect a single characteristic while a manager's job is multi-faceted.

Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 18-03 Understand the reasons why performance measures differ across levels of the organization.
Topic: Multiple Measures or a Single Measure of Performance? 4, 5

8. At the middle levels in the organization, control and performance measurement focus on how people
carry out the daily activities that create the organization's products.

FALSE
At lower levels in the organization, control and performance measurement focus on how people carry
out the daily activities that create the organization’s products.

Blooms: Remember

9. At the upper level of the organization, performance measurement focuses on whether the organization is

TRUE
At the upper level of the organization, performance measurement focuses on whether the organization is

Blooms: Remember

18-54
10. A balanced scorecard is basically a balance sheet prepared using nonfinancial measures.

FALSE
A balanced scorecard is more than a balance sheet prepared using nonfinancial measures; it involves
multiple performance measures.

Blooms: Remember
Learning Objective: 18-04 Understand how the balanced scorecard helps organizations recognize and deal with their conflicting
responsibilities.

11. The concept of a balanced scorecard is to measure how well the organization is doing from the view of
employees, suppliers, customers, business partners, and the community, as well as the shareholders.

TRUE
This is the basic idea behind the balanced scorecard.

Blooms: Remember
Difficulty: 1 Easy
responsibilities.

12. A balanced scorecard uses only nonfinancial measures to determine how well the organization is doing
in view of competing stakeholder concerns.

FALSE
A balanced scorecard uses both financial and nonfinancial measures.

Blooms: Remember
responsibilities.

18-55
13. Continuous improvement involves the search for and implementation of the best way to do something as
practiced by other organizations or in other parts of one's own organization.

FALSE
The search for and implementation of the best way to do something as practiced by other organizations
is benchmarking, not continuous improvement.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-05 Understand how to apply benchmarking to support continuous improvement.

14. One of the important guidelines of benchmarking is to not benchmark everything at the best-in-the-
business level; no organization can be the best at everything.

TRUE
This is a true concept.

Blooms: Remember
Difficulty: 1 Easy

15. The primary objective of benchmarking is to evaluate performance of an activity, operation, or
organization relative to the performance by other companies.

TRUE
This is a basic definition of benchmarking.

Blooms: Remember
Difficulty: 1 Easy

18-56
16. Manufacturing cycle time is the total time involved in processing, moving, storing, and inspecting a
good or providing a service.

TRUE
This is the definition of manufacturing cycle time.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-06 Identify examples of nonfinancial performance measures and discuss the potential for improved performance
resulting from improved activity management.
Topic: Some Common Nonfinancial Performance Measures 6

17. Improving the efficiency of the manufacturing cycle involves decreasing the time spent processing a
good.

FALSE
Efficiency is improved by reducing the time spent moving, storing, and inspecting the product.

Blooms: Remember

18. The number of defective units is an example of a subjective performance measure.

FALSE
The number of defective units is an objective performance measure.

Blooms: Remember
Difficulty: 1 Easy

18-57
19. Partial productivity is the ratio of the value of output to the value of all key inputs.

FALSE
The ratio of the value of output to the value of all key inputs is total factor productivity, rather than
partial productivity.

Blooms: Understand
Difficulty: 1 Easy

20. One advantage of nonfinancial measures is that managers directly involved in operations are likely to
understand them.

TRUE
Managers who are directly involved in operations will understand the components of nonfinancial
measures.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-07 Explain why employee involvement is important in an effective performance measurement system.
Topic: Employee Involvement 7

21. Employee involvement in setting performance objectives is likely to increase the employee's
commitment to the organization.

TRUE
It is true that employee involvement in setting performance objectives will increase commitment to an
organization because the employee experiences a sense of ownership.

Blooms: Remember
Difficulty: 1 Easy

18-58
22. Employees empowered with real decision-making authority are more likely to be more responsive to
customer concerns.

TRUE
This statement is true because empowered employees have the ability to satisfy customer demands.

Blooms: Remember

Multiple Choice Questions

23. ___________ is a firm's ability to generate products or services that are perceived by its customers as
being superior and unique as opposed to those offered by its competitors.

A. Strategy
C. Cost leadership
This is a description of product differentiation.

AACSB: Reflective Thinking
Blooms: Remember
Difficulty: 1 Easy
Topic: The Foundation of a Successful Business Strategy 2

18-59
24. ________ is a firm's ability to implement low costs compared to its competitors with productivity
improvements, increased efficiency, reduction of waste, and the use of cost control.

A. Strategy
C. Cost leadership
This is a description of cost leadership.

AICPA: BB Critical Thinking
Blooms: Remember
Difficulty: 1 Easy
Topic: The Foundation of a Successful Business Strategy 2

25. Which of the following statements is(are) true regarding financial measures?
(A) One disadvantage of using financial measures to evaluate performance is that they are typically
reported on a monthly, quarterly, or annual basis.
(B) One reason financial measures are used to evaluate performance is that they are easily quantifiable.
A. Only A is true.

B. Only B is true.
Both statements are true.

Blooms: Remember

18-60
26. A description of an organization's values, definition of its responsibilities to stakeholders, and
identification of its major strategies is called its:

A. business-level strategy.

B. mission statement.
C. performance objectives.
D. master budget.
This is the definition of the mission statement.

Blooms: Remember
Difficulty: 1 Easy

27. Which of the following nonfinancial measures would not be used to evaluate a middle manager's
performance?

A. Frequency of meeting customer delivery requirements.

B. Amount of unwanted employee turnover.
C. Success in dealing with suppliers.
D. Fulfilling responsibilities to company shareholders.
Middle managers normally do not interact with shareholders.

Blooms: Remember

28. A balanced scorecard shows measures of performance as they related to areas of performance. Which of
the following is a measure of performance of customer value?

A. Gross margin ratio.

B. Retention of existing customers.
C. Hours of job related training.
D. Process cycle time.
Performance of customer value has to do with the retention of existing customers.

18-61
AICPA: BB Resource Management
AICPA: FN Measurement
Blooms: Apply

29. Which of the following is not one of the four areas of strategic action on a balanced scorecard?

A. Business and production process performance.

B. Customer satisfaction measurement.
C. Financial performance.
D. Customer performance.
Customer satisfaction measurement is not a factor related to the balanced scorecard.

Blooms: Apply

30. Which of the following best describes the customer performance area of the balanced scorecard?

A. Indicates how the infrastructure for innovation and long-term growth should contribute to a
company's strategic goals.
B. Indicates how a customer oriented strategy adds financial value.
C. Indicates how areas of the company should work to add value to customers.
D. Measures the company's success in adding value to shareholders.
Customer areas of the balanced scorecard have to do with customer response.

AICPA: BB Marketing
Blooms: Apply

18-62
31. A business model attempts to minimize problems associated with:

A. decentralization.
B. divisional autonomy.
C. goal congruence.
D. maximizing profits.
The business model describes how employees in the organization must perform for the organization to
achieve its goals.

Blooms: Remember
Difficulty: 1 Easy

32. Which of the following statements is(are) false regarding financial measures?
(A) In general, the use of multiple measures to evaluate performance is better than the use of a single
(B) Managers evaluated using multiple measures will most likely act differently than managers
evaluated using single measures.

A. Only A is false.

B. Only B is false.

Blooms: Remember

18-63
33. A balanced scorecard is a set of:

A. performance measures.

B. financial statements.
C. budget schedules.
D. annual reports.
A balanced scorecard is more than financial statements or budgets.

Blooms: Remember
Difficulty: 1 Easy
responsibilities.

34. In general, a balanced scorecard is used to evaluate an organization's performance using:

A. standard costs and variance analysis.

B. multiple financial and nonfinancial measures.
C. financial statements and ratio analysis.
D. the Board of Director's audit committee.
This is a definition of the balanced scorecard.

Blooms: Remember
Difficulty: 1 Easy
responsibilities.

35. One of the results in using balanced scorecards is a shift from a focus on financial results to a focus on:

A. maximizing market share.

B. minimizing budgetary slack.
C. eliminating fraudulent behavior.
D. increasing customer satisfaction.
Satisfied customers may lead to greater share.

18-64
Blooms: Remember
Difficulty: 1 Easy
responsibilities.

36. Which of the following balanced scorecard perspectives focuses on quality and process improvement?

A. Financial.
B. Customer.
Quality and process improvement are internal.

Blooms: Remember
responsibilities.

37. Which of the following balanced scorecard perspectives focuses on customer service issues?

A. Financial.
B. Customer.
Customer service is part of the customer focus.

Blooms: Remember
responsibilities.

18-65
38. Which of the following balanced scorecard perspectives focuses on shareholder's interests?

A. Financial.
B. Customer.
Shareholders are concerned with financial results.

Blooms: Remember
responsibilities.

39. Which of the following balanced scorecard perspectives focuses on employee development?

A. Financial.
B. Customer.
Employee development affects the future capabilities, so this is a growth focus.

Blooms: Remember
responsibilities.

40. In the balanced scorecard, the financial perspective addresses which of the following questions?

Financial perspective takes the shareholders' viewpoint.

18-66
Blooms: Remember
responsibilities.

41. In the balanced scorecard, the internal business process perspective addresses which of the following
questions?

Internal business processes result in financial and customer results.

Blooms: Remember
responsibilities.

42. In the balanced scorecard, the learning and growth perspective addresses which of the following
questions?

Growth looks at improvement and change.

Blooms: Remember
responsibilities.

18-67
43. In the balanced scorecard, the customer perspective addresses which of the following questions?

The customer viewpoint is an external view.

Blooms: Remember
responsibilities.

44. The balanced scorecard measures an organization's performance in all of the following areas except:

A. financial.
B. government.
C. customer.
D. learning and growth.
The balanced scorecard does not measure organizational performance with respect to government.

Blooms: Remember
responsibilities.

18-68
45. ________ communicates an organization's strategy into an inclusive set of performance measures that
provide the structure for implementing that strategy.

A. Productivity component

C. Cost leadership
This is a description of the balanced scorecard.

Blooms: Remember
responsibilities.

46. The first step to the successful implementation of a balanced scorecard is specifying the:

A. organization's vision and strategy.

B. elements that pertain to value-added aspects of the business.
C. owner's expectations about return on investment.
D. objectives of all four balanced scorecard measurement perspectives.
The first step to the successful implementation of a balanced scorecard is specifying the organization's
vision and strategy.

Blooms: Remember
responsibilities.

18-69

A. Inspection Time.

B. Storage Time.
C. Move Time.
D. Process Time.
Process time is the only value-added time to the customer.

Blooms: Apply
Difficulty: 1 Easy

48. Manufacturing Cycle Efficiency (MCE) is computed as:

A. Processing Time × Manufacturing Cycle Time.

B. Processing Time ÷ Inspection Time.
C. Processing Time ÷ Manufacturing Cycle Time.
D. Moving Time ÷ Storage Time.
Processing Time ÷ Manufacturing Cycle Time is the calculation for Manufacturing Cycle Efficiency.

Blooms: Apply


A. Inspection time.

B. Storing time.
C. Moving time.
D. Processing time.
The impact of process time is external, and the value exceeds that of inspection, storing, and move time.

18-70
Blooms: Apply
Difficulty: 1 Easy

50. Mountainburg Corporation keeps careful track of the time required to fill orders. The times recorded for
a particular order appear below:
Hours
Processing Time 1.2
Inspection Time 0.3
Moving Time 3.8
Storing Time 4.2
The manufacturing cycle time was:

A. 5.3 hours.

B. 20.7 hours.
C. 15.4 hours.
D. 9.5 hours.
See calculation below.
Manufacturing Cycle time = Processing time + Moving time + Storing time + Inspection time = 1.2
hours + 3.8 hours + 4.2 hours + 0.3 hours = 9.5 hours

Blooms: Apply
Difficulty: 1 Easy

18-71
51. Travis Corporation keeps careful track of the time required to fill orders. The times recorded for a

Hours
Processing Time 0.7
Inspection Time 0.3
Moving Time 2.9
Storing Time 8.7

A. 0.73.
B. 0.06.
C. 0.15.
D. 0.02.
hours + 2.9 hours + 8.7 hours + 0.3 hours = 12.6 hours; MCE = Value-added time (Process time) ÷
Manufacturing cycle time = 0.7 ÷ 12.6 = 0.06 (rounded)

Blooms: Apply
Difficulty: 1 Easy

18-72
52. Steinwand Corporation keeps careful track of the time required to fill orders. Data concerning a

Hours
Processing Time 1.9
Inspection Time 0.2
Moving Time 2.8
Storing Time 7.2

A. 20.3 hours.

B. 25.2 hours.
C. 4.9 hours.
D. 12.1 hours.
hours + 2.8 hours + 7.2 hours + 0.2 hours = 12.1 hours

Blooms: Apply
Difficulty: 1 Easy

18-73
53. Steinwand Corporation keeps careful track of the time required to fill orders. Data concerning a

Hours
Processing Time 1.9
Inspection Time 0.2
Moving Time 2.8
Storing Time 7.2

A. 0.24.
B. 0.16.
C. 0.92.
D. 0.08.
hours + 2.8 hours + 7.2 hours + 0.2 hours = 12.1 hours; MCE = Process time ÷ Manufacturing Cycle
time; MCE = 1.9 ÷ 12.1 = 0.16 (rounded)

Blooms: Apply
Difficulty: 1 Easy

18-74

Hours
Processing Time 1.6
Inspection Time 0.1
Moving Time 2.6
Storing Time 7.2

A. 4.3 hours.

B. 31.6 hours.
C. 27.3 hours.
D. 11.5 hours.
Manufacturing Cycle time = Processing time + Moving time + Storing time + Inspection time = 1.6 +
2.6 + 7.2 + 0.1 = 11.5 hours

Blooms: Apply
Difficulty: 1 Easy

18-75
Hours
Processing Time 1.6
Inspection Time 0.1
Moving Time 2.6
Storing Time 7.2

A. 0.05.
B. 0.57.
C. 0.14.
D. 0.16.
Manufacturing Cycle time = Processing time + Moving time + Storing time + Inspection time = 1.6 +
2.6 + 7.2 + 0.1 = 11.5 hours; MCE = Process time ÷ Manufacturing Cycle time = 1.6 ÷ 11.5 = 0.14
(rounded)

Blooms: Apply
Difficulty: 1 Easy

56. Which of the following items is not part of the continuous improvement philosophy?

A. Eliminate activities that are nonvalue-added.

B. Improve the efficiency of activities that are value-added.
C. Use benchmarking to identify activities that need improvement.
D. Provide bonus incentives to managers for accurate performance reports.
Accurate performance reports are not part of improvement for most managers.

Blooms: Remember

18-76
57. Benchmarks are used to evaluate the performance of an activity or operation relative to other
organizations or other parts of one's own organization. Which of the following is not a guideline for
using benchmarks to evaluate performance?

A. Benchmarks should only be used for nonfinancial measures.

B. Do not benchmark everything at the best-in-the-business level.
C. Benchmark only best-in-the-business activities that are important.
D. Use internal benchmarks for less important activities or operations.
Benchmarks can be either financial or nonfinancial.

Blooms: Remember

58. Which of the following statements is(are) false?
(A) Internal, regional, and local benchmarks should be used for the most important processes and
activities in an organization.
(B) In general, the use of multiple measures to evaluate performance is better than the use of a single

A. Only A is false.

B. Only B is false.
Only A is false. The most important processes should use best-in-class as the benchmark. The internal,
regional, and local benchmarks would be for the less important support activities.

Blooms: Remember
Difficulty: 1 Easy

18-77
59. Which of the following is typically not considered an objective of quality control?

A. Reduce costs associated with customer complaints.

B. Reduce costs of honoring product or service warranty.
C. Increase customer satisfaction with product or service.
D. Increase the number of deliveries made when promised.
Quality control is normally addressing product quality rather than delivery quality.

Blooms: Remember
Difficulty: 1 Easy

60. Functional performance measures differ from customer satisfaction performance measures in that they
are used primarily to evaluate:

A. internal processes.

B. external processes.
C. benchmark processes.
D. continuous improvement processes.
Most customer service measures focus on external relations while functional measures focus on internal
operations.

Blooms: Remember

18-78
61. Manufacturing cycle efficiency is computed by dividing process time by:

A. moving time + storage time.

B. storage time + inspection time.
C. moving time + storage time + inspection time.
D. process time + moving time + storage time + inspection time.
The denominator is total cycle time or process time + moving time + storage time + inspection time.

Blooms: Remember
Difficulty: 1 Easy

62. Which of the following statements is(are) true regarding performance measures?
(A) In general, objective performance measures are better than subjective performance measures.
(B) In general, the use of multiple performance measures is better than the use of single performance
measures.

A. Only A is true.

B. Only B is true.

Blooms: Remember
Difficulty: 1 Easy

18-79
63. An objective performance measure is one where:


C. different managers will calculate a measure differently.
Objective means different people will agree as to the method to calculate the measure. They may differ
as to whether the measure is appropriate.

Blooms: Remember
Difficulty: 1 Easy

64. A subjective performance measure is one where:


C. different managers will calculate a measure the same.
A subjective performance measure is one where different managers will view the facts and come to
different conclusion. Subjective means two people may disagree on what a measure tells them.

Blooms: Remember
Difficulty: 1 Easy

18-80
65. Which of the following is not a mistake often made when measuring nonfinancial performance?

A. Using subjective rather than objective measures.

B. Not linking measure to strategy.
C. Not validating links between activities and strategies.
D. Not setting appropriate performance targets.
Managers do often use objective measures.

Blooms: Remember
Difficulty: 1 Easy

66. Which of the following performance measures would be used to evaluate the personnel department
performance?

A. Number of product recalls.

B. Percentage of late deliveries.
C. Number of requests for transfers.
D. Length of time to fill vacant positions.
Length of time to fill vacant positions is a performance measure used to evaluate the personnel
department performance.

Blooms: Remember
Difficulty: 1 Easy

18-81
67. Partial productivity measures are most closely related to what type of variances?

A. Price variances.

B. Sales mix variances.
C. Efficiency variances.
D. Production volume variances.
Partial productivity measures are most closely related to efficiency variances.

Blooms: Remember
Difficulty: 1 Easy

68. Total factor productivity:

Total factor productivity is a ratio of the value of output to the value of all key inputs.

Blooms: Remember
Difficulty: 1 Easy

69. If a manager wants to assess performance relative to the industry, it is best to use:

A. partial productivity measures.

B. production volume variances.
C. sales price variances.
D. total factor productivity.
Partial productivity measures include only one aspect of productivity while total factor productivity
attempts to view the bigger picture.

18-82
Blooms: Remember

70. Partial productivity:

Partial productivity looks at single inputs; total factor productivity includes a number of inputs rather
than just one.

Blooms: Remember
Difficulty: 1 Easy

71. Which of the following is not a partial productivity measure?

A. tons output/tons of material used.

B. sales value/total cost.
C. gallons output/direct labor hour.
D. units produced/machine hour.
Sales value/total cost is a total factor productivity measure.

Blooms: Remember
Difficulty: 1 Easy

18-83
72. Which of the following is a total factor productivity measure?

A. Tons output/tons of material used.

B. Units produced/machine hour.
C. Sales value/total cost.
D. Gallons output/direct labor hour.
Sales value/total cost is a total factor productivity measure. All others are using a single input factor to
compute a partial productivity.

Blooms: Remember
Difficulty: 1 Easy


April
Storing product 6.0

A. 87.5%.
B. 63.6%.
C. 62.2%.
D. 42.9%.
14.0/(2.0 + 14.0 + 0.5 + 6.0) = 14.0/22.5 = 62.2%

Blooms: Apply
Difficulty: 1 Easy

18-84

April
Storing product 6.0

A. 14.0 days.

B. 16.0 days.
C. 22.0 days.
D. 22.5 days.
2.0 + 14.0 + 0.5 + 6.0 = 22.5

Blooms: Apply
Difficulty: 1 Easy

75. The Malcolm Company collected the following information (in days):

Storing product 8.0

A. 28.6%.
B. 64.5%.
C. 71.4%.
D. 90.9%.
20/(20 + 8 + 2 + 1) = 20.0/31 = 64.5%

Blooms: Apply
Difficulty: 1 Easy
18-85

76. The Malcom Company collected the following information (in days):

Storing product 8.0

A. 10 days.
B. 31 days.
C. 28 days.
D. 22 days.
20 + 8 + 2 + 1 = 31

Blooms: Apply
Difficulty: 1 Easy

Storing product 15

A. 61.5%.
B. 72.7%.
C. 87.0%.
D. 27.3%.
40/(4 + 6 + 15 + 40) = 40/65 = 61.5%

18-86
Blooms: Apply
Difficulty: 1 Easy

Storing product 15

A. 21 days.
B. 65 days.
C. 55 days.
D. 46 days.
4 + 6 + 15 + 40 = 65

Blooms: Apply
Difficulty: 1 Easy

18-87

Storing product 20

A. 100.0%.
B. 82.2%.
C. 63.1%.
D. 76.5%.
65/(4 + 14 + 20 + 65) = 65/103 = 63.1%

Blooms: Apply
Difficulty: 1 Easy

Storing product 20

A. 65 days.
B. 34 days.
C. 103 days.
D. 85 days.
4 + 14 + 20 + 65 = 103

Blooms: Apply
Difficulty: 1 Easy
18-88


Storing product 6.0

A. 87.5%.
B. 82.4%.
C. 70.9%.
D. 17.6%.
28.0/(4.0 + 28.0 + 1.5 + 6.0) = 28.0/39.5 = 70.9%

Blooms: Apply
Difficulty: 1 Easy


Storing product 6.0

A. 39.5 days.

B. 34.0 days.
C. 32.0 days.
D. 10.0 days.
4.0 + 28.0 + 1.5 + 6.0 = 39.5

18-89
Blooms: Apply
Difficulty: 1 Easy


Labor hours 10,000

A. 2.800.
B. 1.400.
C. 0.714.
D. 0.526.
20,000/28,000 = 0.714

Blooms: Apply

18-90

Labor hours 10,000

A. 2.800.
B. 2.000.
C. 0.526.
D. 0.500.
20,000/10,000 = 2.000

Blooms: Apply


Labor hours 12,000

A. 0.040.
B. 0.080.
C. 12.500.
D. 25.000.
6,000/150,000 = 0.040

Blooms: Apply
18-91


Labor hours 12,000

A. 12.500.
B. 2.000.
C. 0.500.
D. 0.120.
6,000/12,000 = 0.500

Blooms: Apply

87. The White Hot Mining Co. has the following information for last year:

Labor hours 12,000

A. 1.000.
B. 0.069.
C. 14.58.
D. 12.00.
175,000/12,000 = 14.58

Blooms: Apply
Difficulty: 1 Easy
18-92

88. The Trundle Pass Mining Co. has the following information for last year:
Labor hours 112,000

Tons of output produced 1,575,000

A. 1.120.
B. 0.071.
C. 14.06.
D. 112.00.
1,575,000/112,000 = 14.06

Blooms: Apply
Difficulty: 1 Easy

89. The Cave Springs Milling Co. has the following information for last year:

The partial productivity for materials is

A. 0.12
B. 1.31
C. 8.33
D. 15.75
1,575,000/13,112,000 = 0.12.

Blooms: Apply
Difficulty: 1 Easy

18-93
90. The Alma Milling Co. has the following information for last year:

The partial productivity for materials is:

A. 0.131.
B. 0.191.
C. 0.686.
D. 5.236.
1,311,000/6,864,000 = 0.191

Blooms: Apply
Difficulty: 1 Easy


Labor hours 112,000
The partial productivity for material is:

A. 1.136.
B. 0.288.
C. 0.263.
D. 3.802.
1,155,000/4,396,000 = 0.263

Blooms: Apply

18-94

Labor hours 112,000

A. 0.097.
B. 0.256.
C. 3.906.
D. 10.313.
1,155,000/112,000 = 10.313

Blooms: Apply

93. Tungsten Forging Co. has provided the following information for last year:

8,000
produced $60/ton

A. $480,000.
B. $375,000.
C. 1.28.
D. 0.78.
Value of output: 8,000 × $60 = $480,000; Value of input: (10,000 × $10) + (5,000 × $30) + $125,000 =
$375,000; $480,000/$375,000 = 1.28

Blooms: Analyze
18-95

94. Toomey Toolworks Co. has provided the following information for last year:

16,000
produced $75/ton

A. 1.231.
B. 1.600.
C. 2.167.
D. 3.250.
Value of output: 16,000 × $75 = $1,200,000; Value of input: (20,000 × $15) + (15,000 × $30) +
$225,000 = $975,000; $1,200,000/$975,000 = 1.231

Blooms: Analyze

18-96
95. Prancing Products has provided the following information for last year:

@ selling price of
$55/gallon

A. 1.25.
B. 1.60.
C. 15.63.
D. 1.17.
Value of output: 8,000 × $55 = $440,000; Value of input: (10,000 × $15) + (5,000 × $20) + $125,000 =
$375,000; $440,000/$375,000 = 1.17

Blooms: Analyze

96. Sojourn Enterprises has provided the following information for last year:

Labor hours $85,000
@ selling price of
Product produced 32,000
$22/each

A. 1.003.
B. 1.134.
C. 0.882.
D. 0.362.
Value of output: 32,000 × $22 = $704,000; Value of input: $225,000 + $85,000 + $311,000 = $621,000;
$704,000/$621,000 = 1.134

18-97
Blooms: Analyze

97. Premier Products Co. has provided the following information for last year:

Labor hours $45,000
@ selling price of
$45/each

A. $150,000.
B. $312,000.
C. 1.154.
D. 0.832.
$360,000/$312,000 = 1.154

Blooms: Analyze

18-98
98. Moonlight Co. has provided the following information for last year:

Labor costs $90,000
Product produced 16,000 units
Total factor productivity 1,154
The selling price of the product (rounded) is:

A. $45.01.
B. $33.80.
C. $39.00.
D. $28.13.
Value of input: $300,000 + $90,000 + $234,000 = $624,000; X/$624,000 = 1.154; X = $720,096;

$720,096/16,000 = $45.006

Blooms: Analyze
Difficulty: 3 Hard

18-99
99. Magnum Co. has provided the following information for last year:

Gallons input $20,000 @ $15/gallon
Labor costs ???
@ selling price of
$55/gallon
Total factor
1.1733
productivity
The total labor cost (rounded) is:

A. $293,325.
B. $482,500.
C. $468,750.
D. $200,021.
Value of output: 16,000 × $55 = $880,000; $880,000/X = 1.1733; X = $750,021; $750,021 - (20,000 ×
$15) - $250,000 = $200,021

Blooms: Analyze
Difficulty: 3 Hard

18-100
100. Walters Co. has provided the following information for last year:
Gallons input ???

@ selling price of
$55/gallon
Total factor
1.1733
productivity
The total material cost (rounded) is:

A. $293,325.
B. $582,500.
C. $300,021.
D. $200,000.
$20) - $250,000 = $300,021

Blooms: Analyze
Difficulty: 3 Hard

18-101
101. Harringer Co. has provided the following information for last year:

Overhead costs ???
@ selling price of
$55/gallon
Total factor
1.0732
productivity
The total overhead cost (rounded) is:

A. $172,200.
B. $109,989.
C. $140,000.
D. $200,000.
$20) - (5,000 × $20) = $109,989

Blooms: Analyze
Difficulty: 3 Hard

18-102
102. Cavanaugh Co. has provided the following information for last year:
Gallons input ??? @ $20/gallon

@ selling price of
$55/gallon
Total factor
1.0732
productivity
The total number of gallons input (rounded) is:

A. 10,000 gallons.

B. 8,600 gallons.
C. 7,450 gallons.
D. 200,000 gallons.
$20) - $110,000 = $199,989; $199,989/$20 = 9,999 gallons, round to 10,000

Blooms: Analyze
Difficulty: 3 Hard

103. Employee involvement is important in an effective performance measurement system because it:

A. increases the employee's commitment to the organization and its objectives.
B. decreases the employee's reliance on financial performance measures.
C. increases the likelihood that goal congruence problems will occur.
D. decreases the chances of an unfavorable manufacturing cycle time.
Involvement normally has a positive effect on commitment.

Blooms: Remember
Difficulty: 1 Easy

18-103
104. Which of the following is not a difficulty in implementing nonfinancial performance measurement
systems?

A. Fixation on financial measures.

B. Reliability of the nonfinancial measures.
C. Nonfinancial measures decrease goal congruence.
D. Lack of correlation between nonfinancial measures and financial results.
Goal congruence is not related to financial versus nonfinancial measures.

Blooms: Remember
Difficulty: 1 Easy
Topic: Difficulties in Implementing Nonfinancial Performance Measurement Systems 7

Essay Questions


April May
Required:

b. Calculate the processing time required for May so that May's manufacturing cycle efficiency is equal
to April's manufacturing cycle efficiency.

a. April: [14.0/(2.0 + 14.0 + .5 + 8.0)] = 57.1%

May: [16.0/(3.0 + 16.0 + .8 + 5.0)] = 64.5%
b. [x/(3.0 + x + .8 + 5.0)] = .571; x = 11.7

Blooms: Analyze
18-104


July August
Required:


a. July: [17.0/(2.0 + 17.0 + .5 + 7.0)] = 64.2%

August: [18.0/(3.0 + 18.0 + 1.2 + 7.0)] = 61.6%
b. 18.0/x = .65; x = 27.69 days

Blooms: Analyze

18-105

November December
Required:

b. Assume January's processing time will be the same as December's. If Gantry's target for
manufacturing cycle efficiency is 65%, what will be January's target for non-processing times?

a. November: [15.0/(2.0 + 15.0 + 1.0 + 8.0)] = 57.7%

December: [18.0/(3.0 + 18.0 + 1.2 + 7.0)] = 61.6%
b. 18.0/(x + 18.0) = .65; 27.7 = x + 18.0; x = 9.7

Blooms: Analyze

18-106

April May
Required:

b. Calculate the processing time required for May so that May's manufacturing cycle efficiency is equal
to April's manufacturing cycle efficiency.

a. April: [5.0/(2.0 + 5.0 + .5 + 2.0)] = 52.6%

May: [7.0/(3.0 + 7.0 + .8 + 3.0)] = 50.7%
b. [x/(3.0 + x + .8 + 3.0)] = .526; x = 7.5

Blooms: Analyze

18-107

July August
Required:


a. July: [5.0/(2.0 + 5.0 + .5 + 1.0)] = 58.8%

August: [7.0/(3.0 + 7.0 + 0.8 + 3.0)] = 50.7%
b. 7.0/x = .65; x = 10.77 days

Blooms: Analyze

18-108

November December
Required:


a. November: [6.0/(2.0 + 6.0 + 1.0 + 2.0)] = 54.5%

December: [7.0/(3.0 + 7.0 + 0.8 + 3.0)] = 50.7%
b. 7.0/(x + 7.0) = .65; 10.77 = x + 7.0; x = 3.77

Blooms: Analyze

18-109
111. The Everton Manufacturing Company collected the following information (in days):

April May June
Required:
a. Calculate the manufacturing cycle efficiency for April, May, and June.
b. Calculate the processing time required for June so that the manufacturing cycle efficiency is equal to
the most efficient of the previous two months.

a. April: [5.0/(2.0 + 5.0 + .5 + 2.0)] = 52.6%

May: [7.0/(3.0 + 7.0 + .8 + 3.0)] = 50.7%
June: [7.0/(2.0 + 7.0 + 1.0 + 4.0)] = 50.0%
b. [x/(2.0 + x + 1.0 + 4.0)] = .526; x = 7.77

Blooms: Analyze

18-110
112. The Altoona Manufacturing Company collected the following information (in days) for July, August,
and September:

July August September
Required:
a. Calculate the manufacturing cycle efficiency for July, August, and September.
b. Assume October's processing time will be the same as September's. If Altoona's target for
manufacturing cycle efficiency is 65%, what will be October's target for manufacturing cycle time?

a. July: [5.0/(2.0 + 5.0 + .5 + 1.0)] = 58.8%

August: [7.0/(3.0 + 7.0 + 0.8 + 3.0)] = 50.7%
September: [7.0/(2.0 + 7.0 + 1.0 + 4.0)] = 50.0%
b. 7.0/x = .65; x = 10.77 days

Blooms: Analyze

18-111
113. The Gantry Company collected the following information (in days) for October, November, and
December:

October November December
Required:
a. Calculate the manufacturing cycle efficiency for October, November, and December.

a. October: [6.0/(1.0 + 6.0 + 2.0 + 4.0)] = 46.2%

November: [6.0/(2.0 + 6.0 + 1.0 + 2.0)] = 54.5%
December: [7.0/(3.0 + 7.0 + 0.8 + 3.0)] = 50.7%
b. 7.0/(x + 7.0) = .60; 11.67 = x + 7.0; x = 4.67

Blooms: Analyze

18-112

Labor hours 5,000
Tons of forging produced 10,000
Required:
a. Metal.
b. Labor.

a. 10,000 tons output/14,000 tons input = .714

b. 10,000 tons/5,000 hours = 2 tons/hr

Blooms: Analyze


10,000
produced $60/ton
Required:

Value of output: 10,000 × $60 = $600,000; Value of input: (14,000 × $10) + (5,000 × $30) + $125,000
= $415,000; $600,000/$415,000 = 1.446

Blooms: Analyze
18-113

116. Pantipazole Products Co. has provided the following information for last year:

Labor hours $45,000
8,000
produced $45/each
Required:

$360,000/$312,000 = 1.154

Blooms: Analyze

18-114

Pounds of metal input 21,000
Labor hours 8,000
Pounds of output produced 12,000
Required:
a. Metal.
b. Labor.

a. 12,000 pounds output/21,000 pounds input = .571

b. 12,000 tons/8,000 hours = 1.5 pounds/hr

Blooms: Analyze

Pounds of metal
21,000 @ $12/pound
input
Pounds of output @ selling price of
12,000
produced $70/pound
Required:

Value of output: 12,000 × $70 = $840,000; Value of input: (21,000 × $12) + (8,000 × $25) + $165,000
= $617,000; $840,000/$617,000 = 1.361

Blooms: Analyze
18-115

119. Cummings Co. has provided the following information for last year:

Labor costs $70,000
@ selling price of
$60/each
Required:

$540,000/$470,000 = 1.149

Blooms: Analyze

18-116
120. Maeve Co. has provided the following information for last year:

Pounds of input 35,000
Labor hours 8,000
Units of output produced 15,000
Required:
a. Metal.
b. Labor.

a. 15,000 units output/35,000 pounds input = .429

b. 15,000 tons/8,000 hours = 1.875 units/hr

Blooms: Analyze

121. Colbyville Co. has provided the following information for last year:

15,000
produced $85/unit
Required:

Value of output: 15,000 × $85 = $1,275,000; Value of input: (35,000 × $17) + (8,000 × $26) + $142,000
= $945,000; $1,275,000/$945,000 = 1.349

Blooms: Analyze
18-117

122. Beach Co. has provided the following information for last year:

Labor costs $62,000
@ selling price of
$52/each
Required:

$572,000/$393,000 = 1.455

Blooms: Analyze

18-118
123. Melbourne, Inc. has provided the following information for last year:

33,000
produced $85/unit
Required:
a. Metal.
b. Labor.

a. 33,000 units output/42,000 pounds input = .786

b. 33,000 tons/11,000 hours = 3 units/hr

Blooms: Analyze

124. Melbourne Inc., has provided the following information for last year:

33,000
produced $60/unit
Required:

Value of output: 33,000 × $60 = $1,980,000; Value of input: (42,000 × $18) + (11,000 × $24) +
$187,000 = $1,207,000; $1,980,000/$1,207,000 = 1.640

Blooms: Analyze
18-119

125. Indiatlantic Corporation's management keeps track of the time it takes to process orders. During the
most recent month, the following average times were recorded per order:

Hours
Processing Time 1.1
Inspection Time 0.4
Moving Time 0.8
Storing Time 4.8
Required:
a. Compute the manufacturing cycle time.


a. Manufacturing Cycle time = Processing time + Moving time + Storing time + Inspection time
= 1.1 days + 0.8 days + 4.8 days + 0.4 days = 7.1 days
b. MCE = Value-added time (Process time) ÷ Manufacturing Cycle time
= 1.1 days ÷ 7.1 days = 0.15
c. Percentage of time spent on non-value-added activities = 100% - MCE%
= 100% - 15% = 85%

Blooms: Analyze
Difficulty: 1 Easy

18-120
126. During the most recent month at Harrison Corporation, storing time was 3.0 days, inspection time was
0.8 day, processing time was 2.8 days, and moving time was 0.6 day.
Required:
a. Compute the Manufacturing Cycle time.


= 2.8 days + 0.8 days + 0.6 days + 3.0 days = 7.2 days
b. MCE = Value-added time (Process time) ÷ Manufacturing Cycle time
= 2.8 days ÷ 7.2 days = 0.39
c. Percentage of time spent on non-value-added activities
= 100% - MCE% = 100% - 39% = 61%

Blooms: Analyze

127. Michael Corporation's management reports that its average manufacturing cycle time is 6.3 days, its
manufacturing cycle efficiency (MCE) is 0.27, its average move time is 0.1 day, and its average storage
time is 3.9 days.
Required:
a. What is the process time?

b. What is the inspection time?

a. MCE = Process time ÷ Manufacturing Cycle time

0.27 = Process time ÷ 6.3 days
Process time = 0.27 × 6.3 days = 1.7 days
b. Manufacturing Cycle time = Processing time + Moving time + Storing time + Inspection time = 6.3
days = 1.7 days + Inspection time + 0.1 days + 3.9 days
Inspection time = 6.3 days - 1.7 days - 0.1 days - 3.9 days
= 0.6 days

Blooms: Analyze
Difficulty: 3 Hard
18-121

128. Karin Corporation keeps careful track of the time required to fill orders. The times required for a

Hours
Processing Time 0.6
Inspection Time 0.3
Moving Time 2.1
Storing Time 8.4
Required:
a. Determine the Manufacturing Cycle time. Show your work!

b. Determine the manufacturing cycle efficiency (MCE). Show your work!

= 0.6 hours + 2.1 hours + 8.4 hours + 0.3 hours
= 11.4 hours
b. MCE = Value-added time/Manufacturing Cycle time = 0.6 hours/11.4 hours = 0.05

Blooms: Analyze
Difficulty: 1 Easy

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129. Consider the following management activities:

Required:
(a) Identify the sequence in which the decisions must be carried out. Why is it important to carry out
these activities sequentially?
(b) How can an effective cost management system support the above activities?

(a) The sequence of activities is as follows:

It is important to carry out the above activities sequentially because managers must follow a logical
step-by-step approach in successfully managing an organization. For example, selecting the long-term
strategy provides direction to managers regarding how to achieve an organization's objectives. Without
a clear definition of this direction, it would not make sense to try to define the scale and scope of
operations. In the absence of a sequential approach, there is a significant chance of decisions being
made in a haphazard manner resulting in chaos.
(b) An effective cost management system can provide useful support to managers in carrying out the
above activities. First of all, a cost management system can provide information about an organization's
objectives, which will help in determining strategy. The system can gather information about the cost
implications of different levels of scale and scope of operations and the efficiencies associated with
these levels. It can then help in planning and organizing the use of resources by reporting on the cost of
alternative resources, products, and services. Finally, it can report the actual results of the actions taken
by management in terms of how well individual and organizational objectives are achieved. This
feedback can be used by management to modify strategies and/or actions as necessary.

Blooms: Analyze
Difficulty: 3 Hard
Topic: Strategy and Performance 1

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130. Consider a local coffee shop, a Starbucks store, and a retail gas station that offers fresh coffee in its
convenience stores.
Required:
Characterize these stores according to the Porter strategy framework.

While student answers will vary, discussions of the value proposition and the demands that this places
on the organization should be included in the answer.
For example:
Local coffee shop:
Porter Framework: probably best considered a focused competitor - focusing on regional or local coffee
preferences while delivering a consistent product and service experience.
Starbucks coffee shop:

Porter Framework: at least at the outset, Starbucks was a product differentiation-based competitor
delivering on a unique, branded coffee shop experience. More recently, they have to focus on delivering
a consistent product and service experience and on ‘efficiency' as local and regional competitors have
entered the market. This has resulted in the closure of many stores.
Retail gas station convenience store:

Porter Framework: the retail gas station is a focused competitor in the sale of coffee. It addresses a
niche market of customers who seek a ‘one stop' shopping experience and who have an immediate need
to be alert (i.e., drivers who consume coffee as a deterrent to drowsiness). The coffee is typically not of
a quality to warrant ‘branding' (although collaborations with branded coffees such as Starbucks occurs),
and the price, while not high by branded coffee standards, can be set above cost because of the
convenience that is offered.

Blooms: Analyze
Difficulty: 3 Hard

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131. Studebaker Corporation, one of the earliest auto manufacturers, prospered in the late 1940's and into the
1950's. Its advertising after World War II emphasized quality of design and production. The corporation
also used the stability of its work force in its advertisements, often featuring pictures of father and son
working side by side in its factories.
Required:
A. From just this brief description of Studebaker Corporation, which type of competitive strategy—cost
leadership or differentiation—would you guess Studebaker was using? Explain your choice.
B. Given your answer in Part (A), speculate on what market factors might have caused the corporation
to go into bankruptcy and cease production in the mid-1960s.

A. Studebaker attempted to achieve a distinctive quality image in its advertising as a way to differentiate
itself from other auto company products. Presumably, by emphasizing the design and the way the car
was made, the firm was trying to impress that Studebaker would be more desirable than competitive
autos. Additionally, the advertisements tried to appeal to more than just the need for transportation and
this clearly is not a cost leadership issue. (Its cars were competitively priced, but the company was not a
cost leader, nor did it attempt to focus on a particular segment of the auto-buying public.)
B. If differentiation was the chosen answer, it follows that the stress on quality eventually led to higher
cost (and prices) that made the car less competitive. In fact, this was partly the reason the company
failed, but futuristic design resulted in a look the public was not ready to accept. If the students chose
cost leadership as the answer, their explanation would have to be evaluated on the basis of its logic and
originality.

Blooms: Analyze

132. Describe the difference between a company's mission statement and its business-level strategy.

A mission statement is a description of the organization's values, a definition of its responsibilities to the
stockholders, and an identification of the organization's strategies. Business-level strategies are the
organization's plans to compete in each of its businesses.

Blooms: Remember

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133. Levis Strauss and Co., maker of Levi's familiar 501 and 505 brands of jeans, also make a "Signature"
brand that was introduced several years ago for discount retailers such as Wal-Mart. Levi's strategy with
the new jeans was to sell a competitively priced pair. The jeans were to be about one-half the price of
the familiar 501 and 505 jeans. To get costs down Levi's would:
• Use cheaper fabrics and materials.

• Shun costly mass-market advertising.
• Strictly limit the number of fits, styles, and colors.
The Signature brand had a good first year of sales; assume that results for the second year and later are
not yet in.
Required:
1. Assess the new strategy at Levi. What do you think are the potential benefits and risks?
2. How will the firm's value chain and balanced scorecard change as a result of the new strategy?

1. Recent annual reports show that sales and profits on the Signature line are doing well. Levi's has a
portion of its web site devoted to the Signature line (http://www.levistrausssignature.com). The risks of
the new line are that it might pull the company from what has been a tradition of differentiated products
(501, 505) to cost leadership (the Signature line), leaving consumers confused about the Levi brand. The
risks of the new brand include:
• Could turn off department store customers of Levi's core jeans.

• Signature jeans could end up looking and feeling shoddy.
• After a period of buzz, may sink below the radar.
• Customers may get bored and want more variety.
2. The firm's value chain will likely change little, as the manufacture of the jeans will continue to be
produced in low-cost facilities worldwide. The largest difference in the jeans will be in the fabrics used,
the design, and the variety of jeans offered. The balanced scorecard for Levi's is not likely to change
much either, as noted above for the value chain. Levi Straus uses the BSC in its shared services center in
Eugene Oregon.

Blooms: Analyze

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134. For each of the following jobs, identify a possible nonfinancial performance measure.
(a) Computer help desk worker at your university.

(b) Dental hygienist
(c) Airline gate agent
(d) City bus driver

While student answers may vary, below are some examples.
(a) Complaints, time to answer, time to resolve.

(b) Adherence to schedule, repeat visits, satisfaction.
(c) Timely departures, complaints.
(d) Adherence to schedule, complaints, accidents, citations.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-03 Why performance measures differ across levels of the organization.

135. What is a business model?

A business model, also called a strategy map, is a depiction of the links among individual performance
and the goals of the firm. It shows how different elements (units, individuals, levels) of the organization
combine to deliver value to the stakeholders in the firm.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 18-03 Why performance measures differ across levels of the organization.

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136. Explain how producing more units than can be sold can increase operating income. Would this be an
issue in a service company or is it only an issue in a manufacturing environment? Could a company
employ this strategy indefinitely to show continuous increases in profits?

If a company is using absorption costing, some committed product costs will be allocated to units
produced. If production levels exceed sales levels, some of these costs will be inventoried instead of
expensed in the accounting period in question. Since services cannot be inventoried as products, this is
not an issue in a service company. Continuously producing inventories for the sake of production rather
than sales will ultimately lead to an unsustainable buildup in inventory levels, storage costs, or obsolete
inventory. Ultimately the costs will either be written off or the units will be sold. At that time, the
"hidden" costs will be released.

Blooms: Analyze

137. Indicate how the following concepts are used in the preparation of a balanced scorecard. Provide
examples where appropriate.
(a) Leading indicators.

(b) Lagging indicators.
(c) Customer value.
(d) Causal model.

The balanced scorecard is a model that shows how changes in one operation cause or is balanced by
changes in another. It is a causal model in that cause and effect relationships in a company are
identified. For example, the balanced scorecard may attempt to quantify the effect of employee training
on a series of "downstream" events such as percentage of on time deliveries and retention of existing
customers. The model attempts to show the cause and effect relationships among leading and lagging
indicators of organizational performance. Leading indicators are measures of outcome of early value
chain operations that signal future outcomes of later operations. A leading indicator may be success of
retaining existing customers. This could have a great impact on the future profitability of the company,
which would be a lagging indicator, or measure of final outcome of management plans and their
execution. Customer value relates to the customers' perception of the company's results. Reliable and
on time deliveries increase the value that customers place on a company, ultimately leading to repeat
business and retention of existing customers.

Blooms: Analyze
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responsibilities.

138. Describe the four common perspectives that are used in the balanced scorecard.

The four perspectives are: 1) financial perspective, or how the company appears to the stockholders; 2)
customer perspective, or how the company appears to the customers; 3) internal business process
perspective, or what business processes does the company need to excel at in order to satisfy the
customers and stockholders; and 4) learning and growth perspective, or how will the company sustain
its ability to improve and change.

Blooms: Remember
responsibilities.

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18-130
139. Sam Almasi, the CEO of Almasi Technologies Inc. (ATI), a biotechnology firm had recently returned from
a conference on modern cost management and performance measurement methods where he was exposed
to target costing, value-chain analysis, balanced scorecard, activity-based management, and other ideas.
ATI is a five-year old company operating in a growing, but competitive market. It develops and produces
a number of different enzymes for use by research scientists and pharmaceutical companies. Its main
competitors are also small to medium sized firms just like ATI. The key to growth in this industry is the
ability to develop new products in a short time. Gail Stevenson, the vice-president (VP) for research &
development (R&D) has noticed that some of ATI's new developments did not perform well because of the
delays in their introduction into the market. Stevenson is very keen on hiring the best scientists and
ensuring that they stay current in their fields because knowledge is the key competitive weapon in the
biotechnology industry.
Bob Phillips, the controller of ATI had another concern. He has been noticing that the new products were
not only delayed but their actual development costs were usually higher than budgeted. One of his goals
was to see that the new products were profitable for the company.
Linda Joseph, the production manager, had a different concern of her own. Based on her observation, the
production of the new enzymes was taking longer. Her feeling was that the products spent too much time in
the quality control (QC) department. Barry Laker, the manager of the QC department argued that the new
enzymes lacked the rigorous specifications that are demanded in the marketplace. Consequently, the QC
department has to perform additional tests to get to the root cause of the problems.
Almasi had heard complaints from all quarters, and decided to convene a meeting of all the department
heads.
Almasi: Good afternoon, everyone. I am troubled that despite hiring a number of talented scientists, we
are unable to compete effectively in the marketplace. Many of the recent entrants in the game seem to be
beating us easily.
Stevenson: Sam, the key to our growth is rapid introduction of new products. Although my scientists are
developing new enzymes in record times, they seem to be getting held up in manufacturing and especially
the QC department.
Laker: Sam, I think I can pinpoint the root cause of the problem. I agree that our scientists are developing
new enzymes in record times, but they do not seem to be paying any attention to standards. It looks like my
department will have to provide training to them regarding quality control matters.
Stevenson: With due respect, I do not think there is more to know about QC standards. It looks like the
department wants more attention and is therefore creating all this unnecessary fuss.
Joseph: I think I will agree with Barry that there are problems at the R&D side. My production scientists
are also complaining that adequate specifications have not been developed; they have to constantly phone
their R&D counterparts for clarifications.
Stevenson: I do not believe that the production problems can be attributed to R&D. I have personally
screened each and every scientist during the hiring process.
Phillips: I don't think we will make much progress as a company if we keep pointing fingers at one
another. We all must realize that all problems, regardless of their origin, finally affect the bottom-line of
our company. Unless we set aside our differences and work together as a team, we will be unable to
compete with our rivals. Some of our competitors follow best practices, which we must try to emulate.
Almasi: I agree with Bob. We must all look for solutions. I recently attended a conference where noted
speakers talked about the value-chain of a company, interrelationships between functions, and the balanced
scorecard. In fact, some speakers suggested that companies must stop discussing in terms of individual
functions or departments; instead they must talk in terms of processes and understand linkages among all
the processes that exist in an organization. I believe there are a number of ideas that we could adopt. I will
leave the conference proceedings in the library, and suggest that we all read about these different topics.
How about getting together after six weeks and discussing a plan of action? Thank you and see you all after
18-131
six weeks.
Required:
Assume the role of a consultant preparing a report for ATI. Discuss the following aspects in your report:
The internal value-chain of ATI.

The balanced scorecard. Identify the goals of the company under each perspective of the scorecard and
cause-effect relationships, and develop potential measures that could be used.
How the inter-departmental differences can be eliminated.

The internal value-chain of ATI can be illustrated as follows:
ATI must realize that interaction with the customers to understand their needs is very important because of
the specialized nature of the products and their use. The enzymes will be used by research scientists in their
laboratories for testing and other purposes or by pharmacists in developing new medicines. Therefore, a
misunderstanding of these needs can quickly lead to that set of customers not wanting to buy the enzymes
from ATI. Therefore, market analysis, R&D, and product design are extremely important processes in
ATI's internal value-chain.
Another important aspect that ATI must implement is the balanced scorecard, particularly to understand
cause-effect relationships existing among the processes with the value-chain. This will clarify to Stevenson
how upstream processes affect the downstream ones. It also appears that ATI lacks goals. It will be
important for ATI to develop goals and corresponding measures as they pertain to the different
perspectives under the balanced scorecard. The table at the bottom of this discussion list potential
objectives and measures.
A final aspect of importance to ATI is the differences among the senior managers responsible for
individual functions. First of all, top management must stop referring to R&D, production, quality control,
etc. as departments or functions; instead these should be referred to as processes. Second, training is very
important to educate managers that the processes are inter-related or interdependent, and that the actions
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taken by one manager in a process affect the actions to be taken in a different process. Third,
representatives from each process must be put together in teams that have common goals. This teamwork
will enable individuals to recognize other points of view and be in a position to appreciate different points
of view.
Table of objectives and measures:

Balanced
Objectives Measures
Scorecard
Perspective
Learning and Double the
Number of patents
growth number of patents
Be a leader in new Number of new

products products per
year
Business
Reduce defects Number of defects
processes
Decrease

production cycle
time Cycle time
Increase
production Efficiency/cost
efficiency
Increase revenues Percentage of
Customer
from new revenues from
customers new customers
Improve customer Customer satisfaction

satisfaction measure
Improve on-time Percentage of one-

deliveries time
Increase market
deliveries
share
Market share (also

growth %)
Increase return on ROA % (also growth
Financial
assets in ROA)
(Note: Students may come up with a list that is somewhat different from what is contained in the above
table; the basic idea is to get them thinking along the lines of the different perspectives, defining objectives
and outlining measures).

Blooms: Understand
responsibilities.
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18-134
18-135
140. David Palmer, manager of the Paper Products Division of a Graham Corporation, is a strong believer of
outcome measures. During one of his management meetings, he impressed upon his management team
that financial measures are the most important, and that his managers should only focus on improving
those measures.
Nina Meyers, a recent CMA who was at the meeting filling in for her superior, was not too impressed
with Palmer's exclusive focus on financial measures. As the meeting was about to end, she nervously
pointed out to Palmer that his focus on outcome measures could be detrimental to the performance of
the company.
Meyers: Excuse me, Mr. Palmer, but I think it is wrong to place exclusive emphasis on financial
outcome measures. Instead, the emphasis must be on what are known as lead indicators, which provide
information about the likely outcome of managerial decisions.
Palmer: I commend you for your knowledge on recent developments. However, I have more than 20
years' experience in this field and I think I know what I am doing. After all, ultimately financial results
are what we want.
Meyers: I do not dispute that the ultimate result may largely be the financial returns to our
shareholders. However, unless we pay attention to the drivers of the results, we will not understand the
problems that exist in our processes. I can bring you up to date on a new performance measurement
system known as the Balanced Scorecard if you like.
Although Palmer was not too impressed at being challenged, he instructed Meyers to write him a report
on the Balanced Scorecard.
Required:
Prepare a brief report on the Balanced Scorecard with particular emphasis on the following aspects:
• What are leading and lagging indicators?

• Why are leading indicators important?
• What is the relationship between leading and lagging indicators (cause-effect relationships)?
• What are the different dimensions of the Balanced Scorecard?
• What are some examples of indicators pertaining to the different dimensions of the Scorecard?

From: Nina Meyers, CMA, Cost Management Accountant

To: David Palmer, Manager, Paper Products Division
Date: XX/XX/XXXX
Re: The Balanced Scorecard
Thank you for giving me an opportunity to report on the Balanced Scorecard. As the name suggests, the
Balanced Scorecard consists of a set of performance indicators that provide a balanced view of the
performance of a company. It is balanced in the sense that it reports measures belonging to more than
just the financial perspective and because it reports lead and lag indicators.
In general, lead indicators are measures pertaining to activities that precede other activities in the value-
chain, and measures pertaining to activities later in the value-chain are called lag indicators. For
example, manufacturing cycle time is a lead indicator of on-time delivery performance, whereas
percentage of on-time delivery is a lag indicator. Typically, a cause-effect relationship between lead and
lag indicators can be established.
The above mentioned cause-effect relationship can be expressed as follows: organizational learning
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and growth measures inform about future business process efficiency which inform about customer
value which, in turn, inform about financial performance.
Finally, I would like to provide some examples of indicators that might be included in the Balanced
Scorecard. These are as follows:
Organizational Learning and Growth Measures:
• Employee education and training

• Innovativeness
• Opportunities for improvement
Business Process Efficiency Measures:
• Quality
• Productivity
• Cycle time
• Manufacturing Cycle efficiency
Customer Value Measures:
• On-time delivery
• Customer satisfaction
Financial Measures:
• Gross margin ratio

• Return on assets

AACSB: Communication
Blooms: Analyze
responsibilities.

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141. Granite Manufacturing produces high-end furniture products for the luxury hotel industry. Granite has
succeeded through excellence in design, careful attention to quality in manufacturing, and in customer
service, and through continuous product innovation. The manufacturing process at Granite begins with a
close consultation with each customer so that the finished product exactly meets the customer's
specifications. This commonly means unique designs, special fabrics, and high levels of manufacturing
quality. In addition, Granite believes that a key competitive edge it has over other competitors is that it
has an outstanding design staff that is able to work with customers to come up with product designs that
go beyond the customer's expectations.
Required:
Present a balanced scorecard for Granite Manufacturing with 3-4 perspectives and 3-4 quantitative
critical success factors in each perspective.

The four perspectives are shown below, and example CSFs in each perspective.
Financial
Sales, sales growth — by product line and customer
Earnings, by product line and customer
ABC-based product costs
Return on investment, by product line
New investment, by product line
Internal Processes
Measures of quality; number of defects, customer
complaints…
Waste of materials
Cycle time, the time from the start to the finish of
producing an order
Productivity measures; hours per product, materials per
product
Inventory levels
Customer
Lead time; the time from when the order is received until
it is delivered
Retention of profitable customers
Satisfaction, in specific categories; as measured by
customer survey, number of referrals…
Number of new customers
Learning and Innovation
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Training hours
Retention of key employees
Employee satisfaction, as measured by survey or number
of complaints
New product development; number of new product ideas

Blooms: Analyze
responsibilities.

142. Jackie Horner started Glad Rags to combine fashion and sustainability. The original production of
sandals made from recycled plastic has expanded to a complete line of casual footwear. Current sales
total over $2 million. Jackie hired the firm's first controller early this year, and has asked him to detail
suggestions for ways to increase profits. Thomas Roberts, the new controller, has compiled a list of
recommended changes that focus on quality improvements. Glad Rags' customers expect high quality at
a low price, a "value" product. So the company must simultaneously watch costs and quality. After
receiving his list of suggestions, Jackie calls Thomas to her office and says, "I don't see how improving
quality can increase productivity. In fact, it seems to me that efforts to improve quality will slow down
production and decrease productivity."
Required:
Using specific examples, help Thomas explain to Jackie why efforts to improve quality can also boost
productivity. How does productivity play a role in the firm's strategy and competitive environment?

Quality improvements often decrease waste and spoiled units, thus decreasing the amount of input
resources needed. More careful selection of quality raw materials (plastic, buckles, sole materials) will
reduce spoiled units caused by poor quality materials. Better training for cutters and assemblers will
reduce the number of units spoiled by bad workmanship. Care in adjusting and maintaining equipment
should help reduce waste that is machine-caused.
Process re-engineering can help re-define essential tasks and eliminate non-essential tasks. Reducing
the number of times employees must handle material in the production process improves productivity
and eliminates useless effort. Implementing a continuous improvement program should help develop a
sensitivity among the employees to ways of changing their actions to improve both their process and
products.
A focus on both quality and cost is a common feature of cost leadership firms. Jackie's firm and its
products appeal to a "value" driven customer that appreciates very good quality at a low cost. The focus
on quality and productivity at the same time can help the firm achieve its strategy.

Blooms: Analyze
18-140

143. What is the difference between continuous improvement and benchmarking?

Continuous improvement is a philosophy of continuously reevaluating and improving the efficiency of

the organization's activities. Continuous improvement is the search to 1) improve the activities in which
the organization engages through documentation and understanding, 2) eliminating activities that are
nonvalue-added, and 3) improve the efficiency of activities that are value-added. Benchmarking is the
search for and implementation of the best way to do something as practices by other organizations or in
other parts of the organization itself.

Blooms: Remember

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144. Dr. Hal Trotter is the director of the Wellness House, a residential center for recovering alcoholics. A
typical patient spends 3-4 weeks in an intensive program of rehabilitation. The Wellness House has a
staff of 45, including 12 certified therapists, to serve an average patient load of 15. Hal Trotter is
attempting to develop some productivity measures for the center, but is not aware of the limitations of
productivity measurement in not-for-profit organizations. You have been called in as a consultant to
help develop appropriate productivity measures.
Required:
(a) Identify any major differences/limitations you face in developing performance measures for the
Wellness House. (b) Recommend two or three overall measures of productivity that are appropriate for
the Wellness House as a not-for-profit organization.

(a) Many of the outputs and required tasks of this organization cannot be measured precisely, for
example, how does one define patient recovery? Do all patients require the same treatment? The same
amount of each treatment? How does one account for cost differences in size variations of group
treatment? Is the amount or intensity of treatment affected by the insurance benefits available?
(b) Since health insurance providers probably pay for most of the patients' costs of care, some ratio of
financial productivity can be used. An example is the ratio of average days' stay per patient divided into
the "revenue" generated. This measure is effective if the relationship is fairly consistent. Some measures
of the cost of providing different classes of service can be calculated, for example, the cost of
psychotherapy on an individual basis versus the per patient cost of group therapy. Local, regional, and
national data and measures for alcoholic rehabilitation centers should be available as another baseline
standard against which one could judge productivity. As the center gathers its own data over time, trend
analysis of cost changes would be useful for performance measurement.

Blooms: Analyze

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145. Divisional managers of Crusing Incorporated have been expressing growing dissatisfaction with the
current methods used to measure divisional performance. Divisional operations are evaluated every
quarter by comparison with the static budget prepared during the prior year. Divisional managers claim
that many factors are completely out of their control but are included in this comparison. This results in
an unfair and misleading performance evaluation. The managers have been particularly critical of the
process used to establish standards and budgets. The annual budget, stated by quarters, is prepared six
months prior to the beginning of the operating year. Pressure by top management to reflect increased
earnings has often caused divisional managers to overstate revenues and/or understate expenses. In
addition, once the budget had been established, divisions were required to "live with the budget."
Frequently, external factors such as the state of the economy, changes in consumer preferences, and
actions of competitors have not been adequately recognized in the budget parameters that top
management supplied to the divisions. The credibility of the performance review is curtailed when the
budget cannot be adjusted to incorporate these changes. Top management, recognizing the current
problems, has agreed to establish a committee to review the situation and to make recommendations for
a new performance evaluation system. The committee consists of each division manager, the Corporate
Controller, and the Executive Vice President who serves as the chairman. At the first meeting, one
division manager outlined an Achievement of Objectives System (AOS). In this performance evaluation
system, divisional managers would be evaluated according to three criteria:
• Doing better than last year - Various measures would be compared to the same measures of the prior
year.
• Planning realistically - Actual performance for the current year would be compared to realistic plans
and/or goals.
• Managing current assets - Various measures would be used to evaluate the divisional management's
achievements and reactions to changing business and economic conditions.
A division manager believed this system would overcome many of the inconsistencies of the current
system because divisions could be evaluated from three different viewpoints. In addition, managers
would have the opportunity to show how they would react and account for changes in uncontrollable
external factors. A second division manager was also in favor of the proposed AOS. However, he
cautioned that the success of a new performance evaluation system would be limited unless it had the
complete support of top management. Further, this support should be visible within all divisions. He
believed that the committee should recommend some procedures which would enhance the motivational
and competitive spirit of the divisions.
Required:
(1) Explain whether or not the proposed AOS would be an improvement over the measure of divisional
performance now used by Crusing Incorporated. (2) Develop specific performance measures for each of
the three criteria in the proposed AOS which could be used to evaluate divisional managers. (3) Discuss
the motivational and behavioral aspects of the proposed performance system. Also, recommend specific
programs which could be instituted to promote morale and give incentives to divisional management.

(1) The proposed Achievement of Objectives System (AOS) would be an improvement over the current
measure of divisional performance for the following reasons:
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• There appears to be greater participation in the establishment of objectives by divisional managers.
• The use of multiple criteria for performance measures should be a more equitable standard of
evaluation. This performance measure tends to reduce over-emphasis on single measurement criteria
and may also balance extremes in performance in one area versus another.
• Realistic planning encourages accurate budget estimations and promotes intermediate and long-range
planning objectives which enhances goal congruence.
• Static budgets established six months before the start of the year would be replaced by flexible budgets
and would be subject to change as needed.
• The emphasis on performance is based upon factors controllable by and upon efforts actually directed
by divisional managers.
• Divisional managers should have an increased sense of responsibility and control over activities within
their divisions once they are not held responsible for uncontrollable factors.
• Top management support along with timely and regular reviews of performance will promote the
division managers' feeling of self-worth. Programs which may be instituted to promote morale and
provide incentives to divisional managers in conjunction with the achievement of objectives include the
following:
• Intrinsic motivators can be provided by allowing the manager to assess his/her own achievements and
his/her own worth.
• Extrinsic motivators can be developed through a managers' competition against him/herself or with
other divisions with recognition given to the successful participants in the form of awards or monetary
incentives.
(2) Specific performance measures for the criteria "doing better than last year" could include total sales,
contribution margin, controllable costs, net income, net income as a function of sales, return on
investment, market share, and productivity. Measurement of these items should be compared in absolute
terms or by percentages to the prior year. Specific performance measures for the criteria "planning
realistically" could include an analysis of variance between actual and budget and the use of a flexible
budget to determine sales, net income, net income as a function of sales, and return on investment.
Specific performance measures for the criteria "managing current assets" could include accounts
receivable turnover, inventory turnover, return on current assets, and year to year comparisons of
current assets in total and by account classification. (3) The motivational and behavioral aspects of the
achievement of objectives system depend upon the level of acceptance of the system by top
management and the divisional managers. Divisional managers could have a sense of participation in
the role of goal setting and budget development which could encourage goal congruence. Multiple
criteria enhance a sense of equity or fairness, and remove pressures to pursue measured goals, the
achievement of which may conflict with corporate long-run objectives (i.e., promotes goal congruence).
Increased morale can result in participation in budget setting and management level decisions as well as
having positive feedback.

Blooms: Analyze
Difficulty: 3 Hard

18-145
146. Companies are continuously seeking ways to improve quality of production and reduce costs. One of
the areas is to work with suppliers to improve the quality and reliability of parts and products shipped.
In an article entitled "In Defense of Activity-Based Cost Management," Robert S. Kaplan says:
An ABC model can play a major role in improving supplier relationships as well. These relationships
must be a vital part of any quality and cycle-time improvement program. A key insight is to use ABC to
distinguish between low-price and low-cost suppliers. Traditional cost accounting, with its emphasis on
purchase price variances, encourages purchasing people to continually scan the population of potential
suppliers to obtain low price quotations. Most companies have learned, the hard way, that many of their
low-price suppliers are actually extremely high-cost suppliers. (Source: Management Accounting:
November, 1992)
Required:
(a) Explain what Kaplan means by "many of their low-price suppliers are actually extremely high-cost
suppliers."
(b)What general prevention and appraisal activities can be used to improve the quality and reliability of
parts and products shipped from suppliers?

(a) A low price supplier can be a high cost supplier if:
• They offer low prices only when they can deliver large volumes of materials. This requires the
purchasing company to incur costs of storage for materials.
• The company must check items in through a receiving dock and incur excessive paperwork costs.
• The quality of the product shipped is poor, resulting in production defects and excessive quality
control activities related to materials.
• Costs of inspection increase as defective items shipped must be inspected.
• Poor quality materials lead to product breakdowns, leading to external failure costs such as warranty
replacements and product repairs.
• Delivery time may be unpredictable, leading to costs of expediting, rescheduling, unexpected plant
downtime and great increases in confusion.
• Costs of scrap, rework, and obsolescence increase due to defective items.
• Downtime increases due to poor quality materials.
(b) Prevention activities can include certifying suppliers or by using only suppliers of materials that can
guarantee high quality. Appraisal activities can include inspecting materials upon delivery and
providing regular evaluation of suppliers so that they will know how well they are meeting a company's
quality needs.

Blooms: Analyze

18-146
147. What is productivity, and what are the differences between partial productivity measures and total factor
productivity?

Productivity is the efficient conversion of inputs into outputs. In its simplest form, a productivity
measure is output divided by input. Partial productivity measures consider output in relation to only one
input. Total factor productivity tries to evaluate multiple inputs and is a ratio of the value of the output
to the value of all key inputs. Total factor productivity makes it easier to compare different business
units with differing strategies.

Blooms: Remember

148. Explain how nonfinancial performance measures for customer satisfaction may differ from functional
performance measures.

Customer satisfaction measures attempt to measure an organization's performance with respect to its
external customers. Functional performance measures are internal focused and measure the level of
efficiency of processing activities. Many internal performance measures do also relate to the
organization's performance with respect to its customers, so a complete separation between the two is
not always possible.

Blooms: Remember

18-147
149. Why is worker involvement important to an organization's success?

Worker involvement is important for three reasons:
1) Increased worker involvement often translates to an increased commitment to the organization.

2) Workers are able to be responsive at all levels if empowered with decision-making responsibilities.
3) Workers are able to use their skills and knowledge to further develop and to improve the
organization's performance.

Blooms: Remember

150. At some manufacturing companies, line employees are allowed to stop the line or halt production if they
think there is a problem occurring. In other word, if units begin to be processed that are outside of
specifications.
Required:
Discuss the advantages and disadvantage of this employee empowerment policy.

Student answers will vary, but should include some of the following points.
The advantages include:
• Increase employee motivation from being involved in the process

• Improved quality
• Lower cost because problems are identified earlier.
Disadvantages include:
• Higher costs from stopping lines when no problem exists

• Potentially varying quality from different assessments by different employees.

Blooms: Remember

18-148
18-149

Performance Measurement To Support Business Strategy: True / False Questions

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Performance Measurement To Support Business Strategy: True / False Questions

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Chapter 18

Performance Measurement to Support Business Strategy

True / False Questions

Multiple Choice Questions

A. Frequency of meeting customer delivery requirements.

A. Gross margin ratio.

A. Business and production process performance.

A. standard costs and variance analysis.

A. maximizing market share.

A. organization's vision and strategy.

A. Processing Time × Manufacturing Cycle Time.

The manufacturing cycle time was:

The manufacturing cycle efficiency (MCE) was closest to:

The Manufacturing Cycle time was:

The manufacturing cycle efficiency (MCE) was closest to:

The Manufacturing Cycle time was:

The manufacturing cycle efficiency (MCE) was closest to:

A. Eliminate activities that are nonvalue-added.

A. Benchmarks should only be used for nonfinancial measures.

A. Reduce costs associated with customer complaints.

A. moving time + storage time.

A. different people will agree as to the appropriateness of a measure.

A. different people will agree as to the appropriateness of a measure.

A. Using subjective rather than objective measures.

A. Number of product recalls.

A. partial productivity measures.

A. tons output/tons of material used.

A. Tons output/tons of material used.

What is the manufacturing cycle efficiency?

What is the manufacturing cycle time?

What is the manufacturing cycle efficiency?

What is the manufacturing cycle time?

What is the manufacturing cycle time?

What is the manufacturing cycle time?

What is the manufacturing cycle efficiency?

What is the manufacturing cycle time?

What is the manufacturing cycle efficiency?

Transporting product 4.0

What is the manufacturing cycle time?

Tons of metal input 28,000

The partial productivity for metal is:

Tons of metal input 28,000

The partial productivity for labor is:

Feet of metal input 150,000

The partial productivity for metal is:

The partial productivity for labor is:

The partial productivity for labor is:

Labor hours 112,000

The partial productivity for labor is:

The partial productivity for materials is

The partial productivity for materials is:

Material input 4,396,000

The partial productivity for material is:

Material input 4,396,000

The partial productivity for labor is:

The total factor productivity measure is:

Tons of metal input 20,000 @ $15/ton

The total factor productivity measure is:

Gallons input 10,000 @ $15/gallon