Questions and Answers
What is the primary aim of performance measurement?
Which of the following is NOT a type of performance indicator?
What is a cost centre responsible for?
What defines a profit centre?
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What should be considered before investigating a variance?
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Which of the following describes a responsibility centre?
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What constitutes an investment centre?
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What is one objective of performance measurement?
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What best defines responsibility accounting?
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Which of the following is NOT a type of responsibility centre?
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What is the primary function of a cost centre?
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How is performance measured in a profit centre?
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Which statement about investment centres is accurate?
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What key performance measure is used to evaluate an investment centre?
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Which type of centre is most appropriate for a restaurant in a hotel that doesn't influence hotel operations?
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In responsibility accounting, the term 'variance' refers to what?
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How does a profit centre differ from a cost centre?
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What is a characteristic of cost centres that distinguishes them from revenue centres?
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What determines the performance of a revenue centre?
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Which of the following is a characteristic of a manager in a profit centre?
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What is a major reason for establishing a hierarchy of responsibility centres?
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What is typically required for a cost centre to allocate its expenses accurately?
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Which statement best describes qualitative data?
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What is a primary component of measuring productivity?
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How is cost per unit calculated?
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Which of the following best describes effectiveness?
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What does the profit margin indicate?
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What does a cost-sales ratio help identify?
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Which statement accurately reflects how indices are calculated?
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What is a common objective of customer satisfaction metrics?
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Which of the following is considered a qualitative performance measure?
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In what way can flexibility measures benefit a company?
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What aspect do qualitative measures primarily focus on?
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What does the statement 'Sales revenue is up by 14 percent' primarily indicate?
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Which of the following describes gross profit margin?
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How is the index value for a material costing $27 per kg in 20X3 calculated, if the base cost was $15 per kg in 20X0?
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What is a key consideration when deciding whether to investigate a variance?
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What characterizes a controllable cost?
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Which variance would likely require investigation based on materiality?
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What type of performance measures can help management monitor resource use?
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Which of the following is a reason uncontrollable variances should not be investigated?
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How might a performance indicator become useful?
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What could the direct labour efficiency variance indicate?
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Why is it important to compare like with like in performance measurement?
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What might a rising trend in return rates suggest?
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How can management utilize profit as a percentage of turnover?
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What does a performance indicator's comparison to industry averages provide?
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What could be a consequence of investigating immaterial variances?
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What is one function of performance measurement?
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The concept of materiality can be linked to which of the following?
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Which performance indicator can highlight how well resources are used?
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What is the purpose of measuring rejects in materials supplied in manufacturing?
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Which measure is traditionally used to evaluate labor costs?
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What does the efficiency ratio measure?
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How is Return on Investment (ROI) calculated?
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What does Residual Income (RI) account for in its calculation?
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Which of the following is a perspective included in the balanced scorecard approach?
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What is value added time in a manufacturing context?
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What is the implication of a high capacity ratio?
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What is a significant outcome of using the balanced scorecard?
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Why is it important to involve shareholders in setting performance targets?
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What does the term 'perfect' ratio in value added time imply?
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What type of measures does the internal perspective of the balanced scorecard include?
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What aspect does labor performance qualitative measures emphasize?
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What is the significance of variance analysis in management accounting?
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What is the main purpose of the reward system in an organization?
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How does performance-related remuneration differ from base remuneration?
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Which of the following is an example of indirect remuneration?
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What factors may influence the level of rewards an organization offers?
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Which type of remuneration is designed to encourage compliance with workplace rules?
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Which best describes the distinct nature of base remuneration?
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What approach allows employees to select their own benefits from a menu?
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Which of the following is NOT a category of material reward?
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What role does performance-related remuneration play in organizational strategy?
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Which type of remuneration is typically associated with health insurance and extra vacation days?
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Which measures are considered financial customer perspective measures?
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Which of the following is NOT a measure associated with internal processes?
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What is a challenge associated with performance measurement using a balanced scorecard?
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How should an effective reward system be structured?
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What are intrinsic rewards primarily associated with?
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In a contingency approach to reward systems, which factor is considered fundamental?
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What is a potential outcome of conflicting measures in a scorecard system?
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Which of the following statements is accurate regarding extrinsic rewards?
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What aspect of the employment relationship acts as a driving force for employers in a reward system?
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Which feature of a balanced scorecard approach enhances its effectiveness?
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What is one of the main considerations when deciding on the number of measures in a system?
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Which of the following is critical for the success of an effective reward system?
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Which aspect of the reward system influences recruitment and retention policies?
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Study Notes
Purpose of Performance Measurement Systems
- Performance measurement assesses how well an entity meets its plan, applicable to machines, factories, subsidiaries, or entire organizations.
- Classification of performance measures into:
- Financial performance indicators
- Non-financial performance indicators
- Objectives of performance measurement include:
- Identifying concerning performance aspects
- Explaining discrepancies between actual and expected outcomes
- Implementing control measures for performance improvement
- Integral to effective planning and control processes.
Responsibility Centres, Materiality, and Controllability
- Responsibility accounting segments revenue and costs by managerial responsibility to evaluate performance.
- Types of responsibility centres:
- Cost Centre: Focuses solely on costs, with no revenue responsibilities.
- Revenue Centre: Generates revenue without production responsibilities.
- Profit Centre: Manages both revenues and costs, measuring profitability.
- Investment Centre: Oversees costs, revenues, and investments, focusing on return on capital employed.
- Managers are tasked with achieving budget targets; variances indicate potential issues needing attention.
- Materiality: Focuses on significant variances impacting management decisions, advocating for tolerance limits on variances.
- Controllability: Managers are accountable only for controllable costs; uncontrollable items necessitate standard adjustments over past investigations.
Financial Performance Measures
- Performance measurement tracks organizational success against strategic objectives at various levels.
- Financial performance assessed through ratios and percentages.
- Performance indicators provide diverse insights for:
- Resource monitoring
- Organizational control
- Future planning.
Performance Indicators
- Variance analyses act as performance indicators, offering valuable insights for:
- Identifying labor productivity issues via efficiency variances.
- Controlling distribution costs related to turnover.
- Reviewing labor idle hours to assess resource use.
- Measuring profit percentage of turnover for organization management evaluation.
- Comparisons against benchmarks such as:
- Standards, budgets, or historical trends
- Performance across similar organizational sectors
- Industry averages.
Qualitative and Quantitative Measures
- Distinction between:
- Quantitative Measures: Easily expressed in numerical terms (e.g., timeliness).
- Qualitative Measures: Often subjective and challenging to quantify (e.g., customer satisfaction).
- Combination of both types provides a comprehensive performance assessment.
Productivity, Efficiency, and Effectiveness
- Performance evaluation aims to determine:
- Effectiveness: Achievement of goals and targets.
- Productivity: Output relative to input resources.
Performance Measures for Cost Centres
- Productivity: Assesses the volume of products/services produced per input resource.
- Cost per Unit: Total production costs divided by the number of units produced, crucial for controlling production efficiency.
- Indices: Tracks changes in specific variables relative to a base date for impactful insights.
Performance Measures for Revenue Centres
- Sales metrics focus on price and volume, including revenue and market share targets for analysis.
- Additional performance indicators for revenue tracking include:
- Customer returns relative to total sales.
- Flexibility measures indicate how well able a company is to respond to customers' requirements. Measures could be devised to measure how quickly and efficiently new products are launched, and how well procedures meet customer needs.
- Delivery schedules.
- Service efficiency indicators.
Performance Measures for Profit Centres
- Profit Margin: Calculated as (profit/sales revenue) x 100%, indicates profitability status.
- Gross Profit Margin: More focused analysis using gross profit against revenue.
- Cost/Sales Ratios: Facilitate deeper examination of cost structure when profit targets fail.
- Subordinate cost ratios explore specific production cost components relative to sales value.
Resources
- Conventional measures compare actual costs to expected costs spotlighting price variances and material usage.
- Modern environments include metrics like material reject rates and delivery reliability, correlating to labor costs evaluations based on efficiency standards.### Qualitative Measures of Labour Performance
- Qualitative performance measures encompass communication ability, interpersonal relationships, customer impressions, and skill levels attained.
- Managerial performance is influenced by staff performance; high profitability is not the sole indicator of managerial success.
- Traditional measures for variable overheads include variances between actual and budgeted costs.
Time-Based Performance Measures
- Machine downtime reflects total machine hours; this ratio indicates machine usage and efficiency.
- Value-added time represents the production cycle time used directly in creating a product, excluding non-value-added times (e.g., set-up, downtime).
- A 'perfect' value-added time ratio is 100%, which is rarely achievable; high ratios signify minimal non-value-added activities.
Efficiency, Activity, and Capacity Ratios
- Standard hours are critical for assessing efficiency, activity, and capacity.
- Management accounting reports should integrate control ratios involving budgeting and variance analysis.
- The capacity ratio assesses actual vs. budgeted hours worked to gauge planned utilization.
- The activity ratio compares standard hours for actual work produced against budgeted hours.
- The efficiency ratio evaluates labor efficiency by comparing standard hours of work produced to actual hours worked.
Performance Measures for Investment Centres
- Return on Investment (ROI) measures profit relative to capital employed: (profit before interest and tax/capital employed) x 100%.
- Residual Income (RI) measures performance by accounting for an imputed interest cost and depreciation: pre-tax profits - notional interest charge for invested capital.
Balanced Scorecard Approach
- The balanced scorecard includes four perspectives: financial, customer, internal processes, and learning and growth.
- Focuses on a comprehensive set of performance indicators, blending financial and non-financial aspects.
- Each perspective addresses key questions about value creation, customer needs, process excellence, and future capability improvement.
Balanced Scorecard Measures
- Financial: ROI, cash flow, revenue growth, earnings per share.
- Customer: new customers acquired, customer complaints, on-time deliveries, returns.
- Internal: quality control rejects, production speed, labor turnover rate, new product revenue percentage.
- Learning and Growth: time taken for new product development, management information systems.
Challenges with the Balanced Scorecard
- Conflicting measures may arise, complicating target setting and interpretation.
- Measures must not overcrowd reporting; clarity in understanding results is essential.
Reward Systems Overview
- Employment is an economic relationship; rewards are exchanged for labor.
- Extrinsic rewards stem from job context (remuneration, benefits), while intrinsic rewards derive from job content (self-esteem, development).
Effective Reward System
- Aligns with organizational strategic goals and individual employee aspirations.
- Key decisions in monetary rewards include remuneration levels, individual vs. group basis, and overall emphasis on monetary rewards.
Strategic Perspective on Rewards
- Contingency theory posits that reward systems should reflect the organization's strategy.
- Different strategies (cost leadership vs. differentiation) necessitate distinct reward frameworks.
Reward Objectives
- Support recruitment and retention initiatives.
- Motivate performance levels and foster commitment.
- Ensure compliance with workplace standards.
Types of Rewards
- Base remuneration: fixed salary/wage compensation for work.
- Performance-related remuneration: incentives based on individual or team performance.
- Indirect remuneration: employee benefits (e.g., health insurance, vacation days) augmenting base or performance-related pay.
Reward Levels and Influencing Factors
- Remuneration levels are subject to local and national labor market conditions, industry cost efficiency pressures, and legislative influences.
- Government policies can affect wage rates indirectly through fiscal and monetary mechanisms.
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Description
This quiz covers the purpose of performance measurement systems, focusing on how well entities are doing compared to their plans. You will explore the two types of performance measures: financial and non-financial indicators, relevant for various settings such as machines, factories, and entire organizations.