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Performance Evaluation
Performance evaluation is inherent in every business operation since it is part of the controlling
function of management. It is a formal and productive process used in measuring an employee’s or
division’s works and results based on their scope and responsibility.

Responsibility Accounting
An accounting information system and managerial control device that involves:
a. Identifying responsibility centers with their corresponding objectives;
b. Developing measures of achievement of such objectives; and
c. Preparing/analyzing reports of such measures by the responsibility centers.

A responsibility center is a component of an entity (e.g., product line, department, and division) whose
manager has authority over, and is responsible and accountable for, a particular set of activities.
Common types of responsibility centers are:
1. COST CENTER – managers are responsible mainly for the costs incurred by the unit.
(Maintenance Department)
2. REVENUE CENTER – managers are responsible mainly for the revenues generated by the unit.
(Sales Department)
3. PROFIT CENTER – managers are responsible for both revenues and costs of the unit. (Branch
Office)

capital.
24
4. INVESTMENT CENTER - managers are responsible for revenues, costs, and investment of

5. SERVICE CENTER - usually operated as a cost center which exists primarily to provide
specialized support to other segments of the organization.
20
Organizational Structures
1. Centralized Organization - top management makes most decisions and controls most
activities of the organization segments from the firm’s central office.
2. Decentralized Organization - there is employee empowerment; top management grants
subordinates a significant degree of autonomy and independence in operating and making
decisions relating to their sphere of responsibility.
h

NOTE: a responsibility accounting works best in a decentralized organization.

tc

Key Concepts in Responsibility Accounting

1. Goal Congruence - a condition where employees, working on their personal interests or the
interest of their responsibility center, make decisions that help meet the overall goals of the
firm.
Ba

2. Sub-optimization - occurs when one organizational segment takes action that is in its own best
interests, but is detrimental to the organization as a whole.
3. Managerial Effort - the exertion of effort by the decision-makers to reach a common goal or
objective. This includes all conscious actions, such as planning and supervising.
NOTE: to achieve goal congruence and managerial effort the employees must be properly
motivated. Motivation is a drive toward a goal that creates action and effort to achieve that
goal
4. Management by Objectives (MBO) - a behavioral, communications-oriented, responsibility
approach where a manager and his/her subordinates agree upon objectives and the means on
how such objectives can be attained.
5. Authority - the power to direct and exact performance from others, particularly the subordinate,
including the right to prescribe the means and methods by which work must be done.
6. Responsibility - refers to the obligation to perform.
7. Accountability - the duty to report performance to one’s superior and the physical means for
reporting or being able to substantiate performance.
8. Controllability - the extent to which a manager can influence activities, cost, revenues, or
capital.

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The performance report, which is often considered as the end-product of the responsibility
accounting, shows and compares actual results with the intended (budgets or standards) results of a
responsibility center, thereby highlighting material deviations that need corrective actions. The
contents would normally depend on type of responsibility center presenting the performance report:

RESPONSIBILITY CENTER KEY PERFORMANCE MEASURES

Cost Center Variance Analysis: Actual Costs vs.

Budgeted/Standard Costs

Actual > Budgeted = Unfavorable Variance

Actual < Budgeted = Favorable Variance

Revenue Center Variance Analysis: Actual Sales vs.

Budgeted/Target Sales

Actual > Budgeted = Favorable Variance

Actual < Budgeted = Unfavorable Variance

Profit Center Variance Analysis: Actual Profit vs.

Budgeted/Target

Investment Center
24 Actual > Budgeted = Favorable Variance
Actual < Budgeted = Unfavorable Variance

Variance analysis: Actual Profit vs.

20
Budgeted/Target Profit

Segmented Income Statement

ROI, Residual Income, EVA

Financial Performance Measures

h

The segmented income statement is a detailed version of the contribution format of income
statement. This income statement presentation highlights controllability of costs by behavioral
tc

classification. In addition to the usual variable costs and fixed costs, a more detailed classification of
costs may be made:

Sales xx
Ba

Less: VARIABLE Manufacturing Costs (xx)

Manufacturing Contribution Margin xx
Less: VARIABLE Non-Manufacturing Costs (xx)
Contribution Margin xx
Less: Controllable Direct FIXED Costs (xx)
Controllable or Performance Margin xx
Less: Non-Controllable Direct FIXED Costs (xx)
Segment Margin xx
Less: Allocated Common Costs (xx)
Operating Income/Profit xx

★ Direct costs are separable costs that are attributable or traceable to the segment or business
unit.
★ CONTROLLABILITY is based on the degree of influence a manager can exercise over an
amount with reference to assigned responsibilities.
★ Most controllable costs are discretionary costs by nature.
★ Non-controllable costs are either committed costs or costs that are controllable by others or
by a higher authority.
★ CONTROLLABLE or PERFORMANCE MARGIN is usually used to evaluate the performance of
the manager.

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★ SEGMENT MARGIN is usually used to evaluate the performance of the segment or business
unit (e.g., continue vs. shutdown).
★ Common costs allocated to a segment are usually not controllable by the manager of the
same segment.

Problem I
Below are the data concerning the two segments of QRS company for the current month:

A B
Sales P300,000 P600,000
Variable Cost 150,000 240,000
Direct Fixed Cost 50,000 110,000

The 10% of each segment’s direct fixed cost is uncontrollable by the segment manager. The company
has a common fixed cost of P330,000 allocated to each segment based on their respective sales.

1. Prepare a segmented income statement.

2. What is the best measure of the managers’ performance?
3. What is the best measure of the segment’s performance?
4. Should QRS drop any of each segment? Why or why not?

Problem II

24
QRS has two profit centers with a total operating income of P40,000. The total sales of the company
is P300,000, 40% of which is attributable to Division B. Division A has a variable cost ratio of 30%
while B has a contribution margin ratio of 50%. A has a total direct fixed cost of P35,000 while the
common fixed cost QRS is P30,000 which is allocated based on the segment’s respective sales.
20
1. Prepare a segmented income statement.
2. How much is the total variable cost of QRS?
3. How much is the total direct fixed cost of B?
4. Should QRS drop any of each segment? Why or why not?
h

RETURN ON INVESTMENT (ROI)

It is the most common performance evaluation tool used for investment centers. It is considered as a
tc

profitability ratio because it is used to understand the profitability of an investment. It is a measure

focusing on cost-benefit analysis; how efficiently the assets are used.

ROI = Profit Marginx Asset Turnover

Ba

❖ Using the Du Pont Technique, the original equation of ROI is broken down into the following
formulas:
➢ Profit Margin or Return on Sales = Operating Income ÷ Sales
Profit margin measures the ability of an investment center to keep a portion of sales in
the business as income.
➢ Asset Turnover or Investment Turnover or Capital Turnover = Sales ÷ Operating Assets
Asset turnover measures the ability of an investment center to use operating assets to
generate sales or revenues.
➢ Return on Investment or Return on Assets = Operating Income ÷ Operating Assets

❖ Operating Income for most investment centers is based on earnings before interests & taxes
(EBIT) and excludes passive income.
❖ Operating Assets are preferably based on the average balance for the reporting period and
composed of productive assets used to earn the operating income. Idle assets, marketable
securities, investment properties, and other forms of investments that generate passive
income are excluded.
❖ Invested Capital is sometimes used as the denominator for the ROI formula. While the term
means operating assets for most investment centers, invested capital may also mean Total
Assets, Owners’ Equity, Total Assets less Current Liabilities, or Working Capital plus
Non-Current Assets depending on the situation and application.

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Problem III
One of the investment centers of QRS has the following data:

Beginning Ending
Current Assets P300,000 P200,000
Plant Assets 1,500,000 2,000,000
Building held for Rentals 230,000 250,000
Long-term Equity Investments 420,000 400,000

The center has a variable cost of P468,000, contribution margin ratio of 35%, and an operating
income of P300,000 which includes incidental annual rent income of P50,000 and income from bank
deposits of P10,000.

1. What is the Profit Margin?

2. What is the Asset Turnover?
3. What is the Return on Investment?

Problem IV
QRS company is a decentralized company with 4 divisions. One of them is Division A which is an
investment center. Below is the Division A’s data:

Cash
Accounts Receivable
Marketable Securities
Plant Assets
Beginning
P70,000
80,000
40,000
1,500,000
24 Ending
P120,000
130,000
50,000
2,000,000
20
Idle Plant Assets 125,000 165,000
Land held for Future Use 600,000 600,000

Division A’s segment margin is P420,000 which includes interest income from bank deposits and
investment income from marketable securities amounting to P10,000 and P20,000, respectively. What
is the center’s return on investment?
h

RESIDUAL INCOME (RI)

tc

Residual income measures the excess amount of the operating income earned by an investment
center after deducting the desired income.

RI = Operating Income – Desired or Required Income

Ba

★ Desired or Required Income = Average Operating Assets or Investments x Minimum ROI

★ Minimum ROI is also known as desired rate of return, business quota, minimum required rate
of return, target ROI, or required ROI. It is usually based on the imputed interest rate imposed
and set by a higher authority like a head office (for branches) or a holding company (for
subsidiaries).

Problem V
The data for one of the investment centers of QRS is given below:

Sales P420,000
Net Operating Income 63,000
Average Operating Assets 300,000
Minimum ROI 15%

1. What is the Profit Margin?

2. What is the Asset Turnover?
3. What is the Return on Investment?
4. What is the Residual Income?

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Relationship of ROI and RI

★ Under the ROI method, division managers tend to accept only the investments whose returns
exceed the division’s ROI; under the RI method, division managers would accept an investment
as long as it earns an amount in excess of the minimum required return.
★ RI has the advantage of having a better measure of performance than ROI because it
encourages investment in projects that would otherwise be rejected under ROI.
★ A major disadvantage of RI is that it cannot be used to compare divisions of different sizes or
asset bases. RI tends to favor larger divisions because of the larger peso amount involved.

Consider the following relationship between ROI vs. RI and their corresponding implications:
ROI = Minimum ROI Residual Income = 0 (nil) Indifference point

ROI > Minimum ROI Residual Income > 0 (positive) Performance is generally satisfactory

ROI < Minimum ROI Residual Income < 0 (negative) Performance is generally unsatisfactory

Amount Percentage

Ave. Operating Assets xx 100%

Operating Income

Desired Income
xx

(xx) 24 %

(%)
ROI

Min. ROI
20
Residual Income xx %

Problem VI
The data for the following subsidiaries of QRS which are operated as investment centers are as
follows:
A B C
h

Sales P10,000 [6] P70,000

Operating Income [1] 15,000 4,200
tc

Average Assets [2] [5] [9]

Profit Margin 12% [7] [10]
Asset Turnover [3] 1.50 times [11]
ROI 24% 30% [12]
Ba

RI [4] [8] 2,200

The minimum ROI is 20% on all investment centers. Determine the missing figures.

Problem VII
QRS investment center has operating income of P190,00 and average operating assets of P1,000,000.
It requires a minimum ROI of 18%.

1. Determine the current ROI and RI of the center.

2. Assuming there is a proposed investment of P35,000 that will generate income of P6,475,
would the company benefit from this investment?
3. Assuming there is a proposed investment of P35,000 that will generate income of P6,475 and
the manager of QRS is evaluated using ROI, should the investment be made?
4. Assuming there is a proposed investment of P35,000 that will generate income of P6,475 and
the manager of QRS is evaluated using RI, should the investment be made?

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ECONOMIC VALUE ADDED (EVA)

Economic value added is a measure of wealth. It is used to assess an investment center’s financial
performance based on residual wealth by deducting its cost of invested capital from its operating
profit, adjusted for taxes. Is a specific form of RI that measures a segment’s economic profit based
on residual wealth after accounting for the costs of capital; EVA is often used for incentive
compensation & investor relations.

EVA = Operating Income after Tax – Required Income

★ Operating income under EVA is net operating profit after taxes (NOPAT) and excludes passive
income.
★ Required Income = Invested Capital x WACC
★ Among the examples of Invested Capital mentioned above, the Total Assets less Current
Liabilities or Working Capital plus Non-Current Assets is mostly used under EVA.
★ WACC is also called hurdle rate, cutoff rate, target rate, standard rate or minimum acceptable
rate of return.
★ Unlike RI, EVA uses the Weighted Average Costs of Capital (WACC) as the minimum required
rate of return to determine the amount of required income.
★ WACC is computed based on the long-term sources of financing -- debt and equity -- hence, the
computation: (total assets – current liabilities) being equal to (long-term liabilities and equity).
★ Under EVA, operating income after tax is based on the formula EBIT (100% - tax rate).

Problem VIII
24
QRS investment center has the following data for the year:

Pre-tax Income P2,000,000

20
Interest Expense 600,000
Average Current Assets 2,500,000
Average Long-term Assets 8,000,000
Average Current Liabilities 1,500,000
Average Long-term Liabilities 4,000,000
WACC 10%
h

Tax Rate 30%

tc

1. Calculate QRS’ economic value added.

2. Assuming 10% of the average current liabilities are interest bearing, calculate QRS’ economic
value added. HINT: Non-interest bearing current liabilities are deducted from average operating
assets because current liabilities that do not require interest payments are free sources of
Ba

capital.

Problem IX
QRS investment center has the following data for the year:

Profit after Interests and Taxes P1,500,000

Interest Expense 120,000
Passive Income 300,000
Invested Capital 8,000,000
WACC 10%
Tax Rate 20%

1. Calculate QRS’ economic value added.

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OTHER PERFORMANCE MEASURES

Cycle time is the time required to produce a unit of output (time ÷ units produced). While velocity is
the number of units of output that can be produced in a given period of time (units produced ÷ time).

Throughput or Manufacturing Cycle Time

Represents the total time taken from the moment a customer’s order is initiated into production until
the goods are shipped to the customer. It is the time required to convert raw materials into finished
goods which is composed of:
1. Process Time - amount of time in which work is actually done.
2. Inspection Time - amount of time spent to check the products.
3. Move Time - time required to move materials.
4. Queue Time - amount of time a product spends waiting to be processed, inspected, moved,
and/or shipped.

Delivery Cycle Time (OR Customer Response Time OR Lead Time)

The length of time between receiving an order from a customer to the time when completed order is
delivered to such customer

A B C D
Wait Process Time, Inspection Time, Move Time, Queue Time Shipment
Time <— Throughput Time —> Time

24
<— Delivery Cycle Time/Lead Time —>
NOTE: Only process time is value-added time.
20
where, A - Receipt of Order from Customer
B - Start of Production
C - End of Production/Shipment of Goods
D - Receipt of Goods by Customer

Manufacturing Cycle Efficiency (MCE)

h

The objective is to reduce or eliminate non-value added time in the delivery cycle time.
★ MCE = Value-Added Time ÷ Throughput Time
★ If MCE < 1, non-value added time is present in the production process
tc

Problem X
QRS company has the following average number of days spent for each phase of production:
Ba

Wait Time 5 days

Process Time 20 days
Inspection Time 2 days
Move Time 1 day
Queue Time 6 days

1. Determine the delivery cycle time.

2. Determine the throughput time.
3. Determine the manufacturing cycle efficiency.

Problem XI
The management of QRS reported that its average delivery cycle time is 12 days, average
manufacturing cycle time is 10 days, and manufacturing cycle efficiency is 25%. Inspection time is
twice the move time and the queue time is 1.5 days.

1. Determine the wait time.

2. Determine the process time.
3. Determine the move time.
4. Determine the inspection time.

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Productivity Ratio
Productivity ratio is a performance measure that relates the amount of goods and services produced
(output) with the amount and quantity of inputs used to produce such goods and services.
❖ Partial Productivity - the ratio of output to the quantity of a single factor of production (qty of
output produced ÷ qty of input used). Ex: Output per direct material.
❖ Total Productivity (OR Total Factor Productivity) - the ratio of qty of output produced to the cost
of all relevant inputs used based on current period prices (qty of output produced ÷ cost of all
inputs used).

Problem XII
QRS company has the following information:

Units of Output Produced 10,000

Direct Labor Hours 25,000
Direct Materials Used 30,000
Direct Labor Rate per Hour P10
Direct Materials Cost per Pound P5

1. Determine the partial productivity for direct labor.

2. Determine the partial productivity for direct materials.
3. Determine the total factor productivity.

Allocation of Service Department Cost to

Revenue Producing Departments 24
1. Direct Method: ignores any service rendered by one service department to another, it allocates
20
directly to the producing department.
2. Step Method: also called sequential method, recognizes services rendered by service
departments to other service departments.
3. Algebraic Method: also called reciprocal method, allocates costs by explicitly including the
mutual services rendered among all departments.

Problem XIII
h

Cruz Corporation has two revenue producing departments and two service departments labeled as
P1, P2, S1, and S2, respectively. Direct costs for each department and the percentage of services
tc

costs used by various departments are as follow:

Cost Center Direct Costs Percentage of services used by:

S1 S2 P1 P2
Ba

P1 90,000
P2 60,000
S1 20,000 80% 10% 10%
S2 32,000 20% 50% 30%

In calculating predetermined overhead rates, machine hours are used as the base in P1 and direct
labor hours as the base in P2.
P1 P2
Machine Hours 50,000 40,000
Direct Labor Hours 40,000 20,000

Requirement:
Allocate the service department costs to revenue producing departments and compute the factory
overhead rate for P1 and P2 using the following methods:
A. Direct Method
B. Step Method
C. Algebraic Method

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Transfer Pricing
Refers to the amount charged by one segment of the organization for goods/services
transferred/provided to another segment of the same organization.

RATIONALE AND NEED FOR A TRANSFER PRICE

1. To supply adequate information to motivate managers of the different segments of the
organization to make good economic decisions.
2. To supply transparent and useful information that may be used in evaluating the performance
of business segments.
3. To properly distribute economic resources of the organization among the segments or
responsibility centers.
4. To ensure that the autonomy of the various segments of the organization is protected and
respected.

FACTORS CONSIDERED IN SELECTING A TRANSFER PRICING POLICY

1. GOAL CONGRUENCE - a transfer price should permit a segment to operate as an independent
entity and achieve its goals while functioning in the best interests of the organization as a
whole.
2. SEGMENTAL PERFORMANCE - the selling segment should not lose income by selling within
the company.
3. NEGOTIATION - the buying segment should not incur greater costs by buying within the

24
company. Hence, if the product or service could be purchased outside the company, the buying
segment should be allowed to negotiate the transfer price.
4. CAPACITY - if the selling segment has excess capacity, it should be used to produce goods for
transfer within the company. If there is no excess capacity, the selling segment should not
20
incur loss by selling to another segment within the same organization.
5. COST STRUCTURE - costs to be considered in a transfer price should be analyzed and broken
down into variable and fixed components, so that it would be easier to identify relevant cost
items.
6. TAXES - companies use transfer pricing to reduce the overall tax burden of the parent
company. Companies charge a higher price to divisions in high-tax countries (reducing profit)
while charging a lower price (increasing profits) for divisions in low-tax countries.
h

WAYS OF DETERMINING TRANSFER PRICES

tc

Transfer prices may be the:

1. MARKET PRICE IF A MARKET FOR THE GOODS/SERVICES EXISTS
A transfer price equal to the prevailing market price encourages both the selling and the buying
segments to sell/ buy internally.
Ba

2. INCREMENTAL COST PLUS OPPORTUNITY COST TO THE SELLER

The opportunity cost is usually the contribution margin to be lost from outside customers if the
goods are transferred to a buying segment within the firm. This transfer price is the minimum
amount that the selling segment would be willing to transfer the goods/ services to another
segment.
3. FULL ABSORPTION COST
This transfer price includes materials, labor, and allocated fixed factory overhead.
4. COST PLUS MARKUP
The markup may be a lump sum (pesos) or a markup percentage. Cost may be the standard
cost or actual cost.
5. NEGOTIATED TRANSFER PRICE
A negotiated transfer price is appropriate when market prices are subject to rapid fluctuation.
In negotiating a transfer price, the range is:
a. MINIMUM PRICE - seller's point of view; seller's incremental cost plus opportunity cost
b. MAXIMUM PRICE - buyer's point of view; the prevailing market price
6. DUAL TRANSFER PRICE
The seller records the transfer price at the usual market price that would be paid by an
outsider, while the buyer (another segment within the firm) records the purchase cost at cost,
usually the variable production cost.

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Problem XIV
QRS company has two divisions, A and B. Division A produces and sells product X, while Division B
uses the same product. Below are the cost data of X:

Fixed Cost per Unit P90

Variable Cost per Unit 80
Selling Price per Unit 250

Division B buys 10,000 units of X from an outside supplier for P200 each. This year, Division A offered
B its own X at a transfer price of P170 per unit. Division A’s maximum operating capacity is 32,000
units. In relation to this transaction, Division A could avoid P5 per unit of variable selling cost.
However, additional fixed cost amounting to P200,000 is required to be incurred to accommodate the
units for B.

1. Determine the minimum transfer price assuming A sells 20,000 units to outside customers.
2. Determine the minimum transfer price assuming A sells 24,000 units to outside customers.
3. Determine the maximum transfer price.
4. Determine the effect of P170 transfer price to Division B’s income.
5. Determine the effect of P170 transfer price to Division A’s income assuming it currently sells
20,000 units to outside customers.
6. Determine the effect of P170 transfer price to QRS’ income assuming it currently sells 20,000
units to outside customers.

24,000 units to outside customers.

24
7. Determine the effect of P170 transfer price to Division A’s income assuming it currently sells

8. Determine the effect of P170 transfer price to QRS’ income assuming it currently sells 24,000
units to outside customers.
20
Problem XV
Division A of QRS has the following data:

Outside Customers Division B

Sales [40,000 x 22] P880,000
h

[10,000 x 15] P150,000

Variable Cost 480,000 120,000
tc

Fixed cost of P400,000 is allocated based on peso sales. An outside supplier offered B a sales price
of P13 per unit.
Ba

1. Division B negotiated the price of P13 to A, but the latter declined. What is the impact of this to
A’s, B’s, and QRS’ profits, respectively? Assume the sale to outsiders is not affected.
2. Division B negotiated the price of P13 to A. What is the impact of this to A’s, B’s, and QRS’
profits, respectively if A agreed? Assume the sale to outsiders is not affected.
3. Division B negotiated the price of P13 to A, but the latter declined. What is the impact of this to
A’s, B’s, and QRS’ profits, respectively? Assume the 10,000 units that are supposedly sold to B
are sold to outsiders for P14 each.

Balanced Scorecard
★ Is an approach to performance measurement that combines traditional financial measures
with non-financial performance measures.
★ It was created by David Norton and Robert Kaplan in response to VALUE-BASED
MANAGEMENT, which is a performance evaluation technique that focuses on traditional
financial measures.
★ BSC translates an organization’s mission and strategy into a comprehensive set of financial
(lagging indicators) and non-financial (leading indicators) performance metrics classified into
four (4) perspectives:
1. FINANCIAL perspective (“How do we look to shareholders?”). Measures: profit, return on
investment (ROI), operational cash flows.
2. CUSTOMER perspective (“How do customers see us?”). Measures: rank in customer
surveys, repeat order rate, market share, number of complaints.

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3. INTERNAL BUSINESS PROCESSES perspective (“What must we excel at?”). Measures:

manufacturing cycle efficiency, delivery cycle time, scrap and rework, productivity factor.
4. LEARNING & GROWTH perspective (“Can we continue to improve and create value?”).
Measures: employee satisfaction ratings, employee turnover rate, training days for
employees
★ Customer, internal business process, and learning & growth perspectives are leading activities
since they are necessary activities in generating revenues, incurring costs, and increasing the
firm’s wealth. Financial perspective is a lagging activity because every other perspective has
financial consequences that affect the firm’s profitability and wealth.
★ Measures in the internal business process, learning and growth perspectives (controllable
factors) are the primary drivers of measures in the customer and financial perspectives
(non-controllable factors).
★ BSC provides a framework not only for performance measurement but also for execution of
company strategies by helping management identify what needs to be done and how its
achievement can be measured to determine organizational success.

STRATEGY MAPPING is a process that links the four BSC perspectives with company strategies
based on a cause-and-effect pattern to see where value can be added further.

Components of a Balanced Scorecard Report

1. STRATEGIC OBJECTIVES – statements of what the strategy must achieve & what is critical to
its success.

24
2. STRATEGIC INITIATIVES – key action programs required to achieve strategic objectives.
3. PERFORMANCE MEASURES – describe how success in achieving the strategy will be
measured.
4. BASELINE PERFORMANCE – the current level of performance for the performance measure.
20
5. TARGETS – the level of performance or rate of improvement needed in the performance
measure.

Strategic objectives focus on WHAT is to be achieved. Strategic initiatives focus on HOW it will be
achieved. Performance measures, baseline performance and targets relate to how it will be
MEASURED.
h

Problem XVI
tc

QRS uses a balanced scorecard as an integrated tool for performance evaluation. The following are
the different performance evaluation measures under BSC:

1. Return on sales
Ba

2. Delivery cycle time

3. Number of secured patents
4. Market share
5. Manufacturing cycle efficiency
6. Employee training hours

Determine the proper category of the BSC from which the above performance measures should be
grouped.

Multiple-Choice Questions
1. Which sequence reflects an increasing level of responsibility?
a. Cost center, profit center, investment center
b. Cost center, investment center, profit center
c. Profit center, cost center, investment center
d. Investment center, cost center, profit center

2. “A business within a business” most likely refers to a (an)

a. Investment center c. Profit center
b. Service center d. Cost center

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3. A manager of a profit center is responsible for all of the following, except:

a. Sales revenue c. Expanding into new geographic areas
b. Selling and marketing costs d. Cost of merchandise for resale

4. In responsibility accounting, what is the most relevant classification of costs?

a. Fixed and variable c. Controllable and non-controllable
b. Discretionary and committed d. Incremental and non-incremental

5. A controllable cost is any cost that can be ___ by the responsibility center manager for a period
of time.
a. Allocated c. Segregated
b. Influenced d. Eliminated

6. Which technique is most appropriate to evaluate the management performance of a cost

center?
a. Payback method c. Return on assets ratio
b. Variance analysis d. Return on investment ratio

7. The segment margin of the Division ABZ of ZBN Corporation should NOT include
a. Net sales of ABZ
b. Variable selling expenses of ABZ
c. Fixed selling expenses of ABZ

24
d. ABZ’s share of company president’s salary

8. When using a contribution margin format for internal reporting purposes, the major distinction
between segment manager performance and segment performance is:
20
a. Unallocated fixed cost
b. Direct fixed cost controllable by others
c. Direct variable cost of selling the product
d. Direct fixed cost controllable by the segment manager

9. Which of the following describes the computation of Return on Investment (ROI)?

h

a. Sales x Investment Turnover

b. Income – (Investment x Minimum ROI)
tc

c. Return on Sales x Investment Turnover

d. Return on Sales x Investment

10. Residual income (RI) is

Ba

a. Contribution margin less the minimum return on average operating assets

b. Contribution margin plus the minimum return on average operating assets
c. Net operating income less the minimum return on average operating assets
d. Net operating income plus the minimum return on average operating assets

11. ROI and RI can be used to evaluate performance of

a. Cost centers c. Profit centers
b. Revenue centers d. Investment centers

12. Economic value added (EVA) is similar to (I) but uses (II) as the minimum desired rate of
return.
a. (I) RI (II) imputed interest rate
b. (I) ROI (II) imputed interest rate
c. (I) RI (II) weighted-average costs of capital
d. (I) ROI (II) weighted-average costs of capital

13. The objective of a transfer pricing system should be to:

a. Minimize transfer price c.Promote goal congruence
b. Maximize transfer price d. Minimize product outsourcing

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14. What is usually considered as the best transfer to use in intracompany sales given that
company divisions are independent from one another?
a. Cost-based transfer price
b. Market-based transfer price
c. Arbitrary price
d. Negotiated price

15. Which of these methods is described by a transfer price equal to 120% of a certain base
amount?
a. Cost-based transfer price
b. Market-based transfer price
c. Arbitrary price
d. Negotiated price

16. The minimum transfer price generally is equal to the

a. Opportunity costs plus incremental costs
b. Opportunity costs less additional outlay costs
c. Opportunity costs divided by the additional outlay costs
d. Opportunity costs times 125% plus the additional outlay costs

17. It translates an organization’s mission and strategy into a comprehensive set of performance

b. Cost Leadership
24
measures that provide the framework for implementing the company’s strategy.
a. Focus c. Balanced Scorecard
d. Product Differentiation

18. What is the MOST important purpose of a balanced scorecard?

20
a. Develop strategy c. Develop cause-and-effect linkages
b. Measure performance d. Set priorities

19. The balanced scorecard is said to be “balanced” because it measures

a. Internal and external objectives c. Financial and non-financial objectives
b. Short-term and long-term objectives d. All of the choices
h

20. Which balanced scorecard perspective is considered to be a lagging (rather than leading)
tc

indicator?
a. Customer c. Learning & growth
b. Financial d. Internal business processes
Ba

21. What is the correct order of strategy mapping that links the four balanced scorecard
perspectives?
a. Financial, customer, internal business processes, learning & growth
b. Internal business processes, learning & growth, financial, customer
c. Learning & growth, internal business processes, customer, financial
d. Customer, financial, learning & growth, internal business processes

22. Which of the following is NOT a component of a typical balanced scorecard report?
a. Strategic objectives c. Strategic initiatives
b. Targets d. Assessment of human resources

23. What is the correct formula for manufacturing cycle efficiency (MCE) ratio?
a. Value-added time ÷ Lead time
b. Throughput time ÷ Delivery cycle time
c. Value-added time ÷ Throughput time
d. Non-value-added time ÷ Throughput time

24. In MCE computation, which of the following is considered as a value-added activity?

a. Inspection time c. Move time
b. Processing time d. Idle time

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25. Which of the following scenarios is considered as counter-productive?

a. More outputs, same inputs c. More outputs, fewer inputs
b. Same outputs, fewer inputs d. Fewer outputs, same inputs

26. The following is the summarized income statement of Ruby Co.’s profit center for October:
Contribution Margin P 70,000
Period Expenses:
Manager’s salary P 20,000
Facility depreciation 8,000
Corporate expense allocated 5,000 (33,000)
Profit center income P 37,000

Which of the following amounts is most likely subject to the control of the profit center’s
manager?
a. 70,000 c. 37,000
b. 50,000 d. 33,000

27. The following information pertains to Bronze Co. for the year ended December 31, 2021:
Sales: P 600,000
Income: P 100,000
Capital investment: P 400,000

b. (6/4) x (1/6)
24
Which of the following equations should be used to compute Bronze’s ROI?
a. (4/6) x (6/1) c. (4/6) x (1/6)
d. (6/4) x (6/1)
20
28. If Division Copper has a 10% return on sales, income of 5,000 and in investment turnover of 4x,
divisional investment is
a. 5,000 c. 20,000
b. 12,500 d. 50,000

29. The following information pertains to Silver Co.’s Gold Division for the current year:
h

Sales P 311,000
Variable cost 250,000
tc

Traceable fixed cost 50,000

Average invested capital 40,000
Imputed interest rate 10%
Ba

What was Gold’s return on investment?

a. 10% c. 27.50%
b. 13.33% d. 30%

30. Mr. Sy is the general manager of the XXX Division, and his performance is measured using the
residual income method.Mr. Sy is reviewing the following forecasts for his division for the next
year:
Working capital P 1,800,000
Revenue 30,000,000
Plant and equipment 17,200,000

If the imputed interest charge is 15% and Mr. Sy wants to achieve a residual income of P
2,000,000, what will costs have to be in order to achieve the targeted residual income?
a. P 9,000,000 c. P 25,150,000
b. b. P 10,800,000 d. P 25,690,000

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31. The following information is available for the wholesale products division of Aluminum
Company:
Net operating profit before interests and taxes P 30,000,000
Depreciation expense 10,000,000
Change in net working capital 5,000,000
Capital expenditures 4,000,000
Invested capital (total assets – current liabilities) 50,000,000
Weighted-average cost of capital 10%
Tax rate 40%

What is the economic value added (EVA) for the division?

a. P 25,000,0000 c. P 13,500,000
b. P 18,000,0000 d. P 13,000,000

32. Myrrh Co. reported these data at year-end:

Pre-tax operating income P 4,000,000
Current liabilities P 2,000,000
Current assets 4,000,000
Long-term liabilities 5,000,000
Long-term assets 16,000,000
Tax Rate 25%

a. 1,380,000
b. 1,830,000
24
Assuming a weighted average cost of capital (WACC) of 9%, what is Myrrh Company’s
economic value-added (EVA)?
c.1,620,000
d.3,000,000
20
33. The AAA Division of a company, which is operating at capacity, produces and sells 1,000 units
of a certain electronic component in a perfectly competitive market. Revenue and cost data are
as follows:

Sales: P 50,000 Fixed costs: P 12,000 Variable costs: P 34,000

h

What is the minimum transfer price that should be charged to the BBB Division for each
tc

component?
a. P 12.00 c. P 46.00
b. P 34.00 d. P 50.00
Ba

34. Division A of the company is currently operating at 50% capacity. It produces a single product
and sells all its production to outside customers for P 13 per unit. Variable costs are P 7 per
unit, and fixed costs are P 6 per unit at the current production level. Division B, which currently
purchases this product from an outside supplier for P 12 per unit, would like to purchase the
product from Division A. Division A will operate at 80% capacity to meet outside customer’s
and Division B’s demand. What is the minimum price that Division A should charge Division B?
a. P 7.00 per unit c. P 12.00 per unit
b. P 10.40 per unit d. P 13.00 per unit

35. If a transfer price of P84 is determined using the transfer pricing formula and the lost
contribution margin per unit on outside sales is P28, then the variable cost per unit must be:
a. P 3 c. P 112
b. P 56 d. P 2,352

References:
1. Abitago, K. G. Strategic Cost Management (2024). Real Excellence Publishing, Inc.
2. Roque, R. S. Reviewer in Management Advisory Services (2016). GIC Enterprises & Co., Inc.
3. Review Materials from Review School of Accountancy

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