Accounting Q&A · Cost and Management Accounting · Topic 19
Work through the questions, then reveal the answers to check your reasoning.
25 short-answer questions. Try each question before revealing its answer.
Worked example
A division earns 120,000 on average invested assets of 800,000. ROI is 15%. At a required return of 10%, residual income is 40,000.
Core concepts
1. What is a performance measure?
A defined metric used to track progress against an objective.
2. What is a financial measure?
A metric stated in monetary terms or based on financial amounts.
3. What is a non-financial measure?
A metric such as defects, delivery time or customer satisfaction.
4. What is a lagging indicator?
A measure of an outcome that has already occurred.
5. What is a leading indicator?
A measure intended to signal a possible future outcome.
6. What is ROI for an investment centre?
Defined operating profit divided by the defined investment base.
7. What is residual income?
Operating profit less a required return charge on invested capital.
8. What is asset turnover?
Revenue divided by the relevant average asset base.
9. How does margin relate to ROI?
Profit margin times asset turnover gives ROI when definitions align.
10. What is a controllable profit measure?
A measure focusing on revenue and costs the manager can influence.
Worked applications
11. A division earns 90,000 on 600,000 assets. What is ROI?
15%.
12. At a 12% required return, what is residual income?
18,000 using the same amounts.
13. Sales are 500,000 and profit 50,000. What is profit margin?
10%.
14. With assets of 250,000, what is asset turnover?
Two times.
15. What ROI follows from 10% margin and two turns?
20%.
16. A new project returns 13% and the hurdle rate is 10%. Why might a manager with 16% current ROI reject it?
It can reduce their reported average ROI even while earning above the hurdle rate.
17. How do you calculate defect rate?
Defective units divided by the relevant units inspected or produced.
18. What is defect rate for 18 defects across 900 units if each defect is on a different unit?
2% defective units.
19. How do you calculate on-time delivery rate?
On-time deliveries divided by total eligible deliveries.
Review and exam practice
20. What is first-pass yield?
The share of units passing a process without rework.
21. Why measure both speed and quality?
A faster process can generate errors and rework that outweigh the time savings.
22. What makes a measure comparable?
Consistent scope, definitions, period and data collection methods.
23. Why use benchmarks carefully?
Different business models or customer mixes can make apparent gaps misleading.
24. How can incentives distort measures?
Staff may optimise the metric while neglecting the underlying objective.
25. What should a performance review include?
Explain drivers, trends, data limitations and the action assigned.