Chapter 18: Strategic performance measurement

Question 1

What is performance measurement?

Answer 1

process identifying and gathering information about performed work and results achieved by an individual , activity, process, or organizational unit as compared to preestablished criteria.

Question 2

What is management control?

Answer 2

System used by upper-level managers to evaluate performance of mid-level managers.

Question 3

What are the three objectives of management control?

Answer 3

1. Motivate
2. Provide right incentives
3. Determine fair rewards

Question 4

What is operational control?

Answer 4

monitoring short-term performance to take place when mid-level managers monitor activities of operating-level managers and employees.

Question 5

What is a strategic business unit?

Answer 5

well-defined set of controllable operating activities over which an SBU manager is responsible.

Question 6

What is a principal-agent model?

Answer 6

conceptual model that contains key elements that contracts must have to achieve desired objectives

Question 7

Name three important considerations in a principal-agent model?

Answer 7

1. Controllability
2. Risk aversion
3. Information asymmetry.

Question 8

Name three general principles to structure contracts in principal-agent relationships?

Answer 8

• Alignment: agent should be rewarded for achieving the same outcome goals as top management desires
• Exclude known uncontrollable factors from the contract
• Introduce risk-sharing features in the contract

Question 9

What is strategic performance measurement?

Answer 9

system used by top management to evaluate SBU managers

Question 10

Name four different types of SBU’s?

Answer 10

1. Cost center
2. Revenue center
3. Profit center
4. Investment center

Question 10

What is decentralization?

Answer 10

decision-making approach in which top management delegates significant amount of decision authority and responsibility to subunit managers.

Question 11

What is a cost center?

Answer 11

firm’s production or support unit evaluated on cost basis

Question 12

What is a revenue center?

Answer 12

business units with responsibility for sales

Question 13

What is a profit center?

Answer 13

business unit whose manager is responsible for revenues and expenses but not for invested capital

Question 14

What is an investment center?

Answer 14

business unit including in its financial performance metric the level of assets employed and profit generated.

Question 15

Name three strategic issues related to implementing cost centers?

Answer 15

1. Cost shifting: department replaced controllable costs with noncontrollable costs
2. Excessive-short term focus
3. Role of budgetary slack

Question 16

What is the discretionary-cost method?

Answer 16

used when costs are considered largely uncontrollable: input-orientated approach that applies discretion at planning stage

Question 17

What is the engineered-cost method?

Answer 17

output-oriented method considering costs to be variable, and therefore controllable.

Question 18

What is dual allocation?

Answer 18

cost allocation method separating fixed and variable costs and traces variable service department costs to the user departments.

Question 19

What are order-filling costs?

Answer 19

expenditures for freight, warehousing, packing and shipping, and collections

Question 20

What is order-getting costs?

Answer 20

expenditures to advertise and promote the product

Question 21

What is the contribution by profit center?

Answer 21

measures profit after all traceable costs and is therefore a performance measure that is controllable by the profit center manager

Question 21

What is the contribution income statement?

Answer 21

variable costs are subtracted from sales to get total contribution margin, from which fixed costs are subtracted, to yield amount of operating profit for the period

Question 22

What are controllable fixed costs?

Answer 22

fixed costs that profit center manager can influence in approximately one year or less

Question 23

Noncontrollable fixed costs?

Answer 23

costs that are not controllable within a year’s time, usually including facilities-related costs such as depreciation, taxes and insurance

Question 24

What is controllable margin?

Answer 24

margin determined by subtracting short-term controllable fixed costs from the contribution margin

Question 25

What is the difference between variable and full costing?

Answer 25

Variable costing: costing system where only variable production costs are included in the calculation of cost of sales. Fixed production costs are not included in inventory costs but are expenses in the period they are incurred. Full costing: costing system in which all production costs are included in the calculation of cost of sales.

Question 26

How do you calculate the difference in income between variable and full costing?

Answer 26

Change in inventory * Fixed manufacturing cost per unit

Question 27

What are the six steps to effectively implement nonfinancial measures?

Answer 27

1. Develop a predictive model 2. Gather data 3. Turn data into information 4. Continually refine the model 5. Base actions on findings 6. Assess outcomes