Which of these is a disadvantage of the residual income performance measure?

Financial and Managerial Accounting: The Basis for Business Decisions, 12/e

---

Rewarding Business Performance

Please answer all questions

Accounting systems help create and set goals and objectives through planning information such as budgeting.A)TrueB)False
Accounting systems measure progress toward the goals and provide feedback about that progress.A)TrueB)False
Accounting based information is instrumental in allocating rewards for progress toward goal achievement.A)TrueB)False
The return on investment (ROI) basically tells managers the amount of earnings expected for every sales dollar generated.A)TrueB)False
Capital turnover tells managers about how the invested capital is generating sales dollars.A)TrueB)False
The Du Pont system of performance measurement is a method that analyzes business performance by considering both the earnings per sales dollar and the investment used to generate those sales dollars.A)TrueB)False
Using ROI as a primary motivator for management performance can result in mangers making decisions that increase the ROI for their responsibility center but do not meet the goals and objectives of the organization.A)TrueB)False
Managers can improve the ROI of their responsibility centers by purchasing higher quality merchandise at higher prices.A)TrueB)False
Under some circumstances, using ROI as the only business performance measure may present an incentive for a manager to reject a good project that would increase the ROI for the organization as a whole.A)TrueB)False
When units within an organization share invested capital, the allocation of that capital to measure ROI is a simple, straightforward process.A)TrueB)False
Residual income is the amount by which operating earnings exceed a minimum acceptable return on the average invested capital.A)TrueB)False
The measurement of residual income is a refinement of the economic value added (EVA) measurement.A)TrueB)False
The EVA performance measure motivates managers to turn down investments that are expected to earn a return below their current ROI.A)TrueB)False
There are few if any major criticisms of using residual income and EVA as performance evaluation tools.A)TrueB)False
The balanced scorecard is a systematic attempt to create a business performance measurement process that integrates objectives across the span of the value chain.A)TrueB)False
Customer profitability is one of the measures of the success of the strategies under the customer perspective lens of the balanced scorecard.A)TrueB)False
The number of on-time deliveries is one of the measures of the success of the strategies under the customer perspective lens of the balanced scorecard.A)TrueB)False
The EVA is one of the measures of the success of the strategies under the financial perspective lens of the balanced scorecard.A)TrueB)False
Organizations can avoid the difficulties associated with the balanced scorecard by increasing the number of measures used in each of the perspectives to critical business issues.A)TrueB)False
One method of motivating managers to make decisions that are in the best interest of the organization is to provide stock options as part of, or in place of, the bonus compensation.A)TrueB)False
One of the disadvantages of using a fixed bonus rather than variable bonus as a means of management compensation is that the fixed bonus does not usually accommodate a complex system like a balanced scorecard.A)TrueB)False
Compensation designers will often tie incentives only to stock market information and ignore accounting information.A)TrueB)False
The grading system in most academic settings is a competitive incentive scheme.A)TrueB)False
Compensation designers must take care that the compensation design does not create goal incongruence between the individual and the organization.A)TrueB)False
Accounting information plays an important role in aligning employee and organizational goals and in motivating employees to achieve those goals. How does the accounting system provide this motivation?A)It helps create and set goals.B)It helps measure progress.C)It provides feedback.D)It is instrumental in allocating rewards.E)All of the above.
The current ROI of a profit center is 10.0%. Its return on sales of $2,000,000 is 20%. What is the average invested capital?A)$4,000,000B)$2,000,000C)$6,000,000D)$ 200,000E)Cannot be determined
The current ROI of a profit center is 10%. Its return on sales of $1,500,000 is 30% and operating earnings are $450,000. What is the capital turnover?A)40.0%B)20.0%C)33.3%D)44.4%E)30.0%
Operating earnings are currently $300,000 from sales of $1,500,000. The average invested capital of $5,000,000 is expected to increase $600,000, which is anticipated to increase the ROI to 8%. The return on sales is anticipated to increase to 25%. What is the anticipated increase in sales?A)$ 75,000B)$120,000C)$148,000D)$292,000E)$268,000
The current ROI is 6%. Total sales were $200,000, the cost of goods sold was $100,000, and the operating expenses were $40,000. The average invested capital is $1,000,000. An investment in equipment will reduce the cost of goods sold by 10% and will increase the average invested capital to $1,040,000. Sales volume and operating expenses are not expected to change in the subsequent period. Which of the following is not true?A)Capital turnover will be 19.2%.B)Return on sales will be 35.0%.C)Operating earnings will be $70,000.D)The cost of goods sold will be $90,000.E)ROI will be 5.3%.
Which of the following is not a criticism of using ROI and the Du Pont system as the only business performance measurement?A)The short horizon problemB)Failing to undertake profitable investmentsC)Measurement problemsD)The earnings per sales dollar is ignoredE)All of the above

Consider the following:
Sales $4,500,000
Cost of goods sold $2,500,000
Operating expense $1,200,000
Invested capital $6,000,000

What is the residual income if the minimum acceptable return is 12%?A)$720,000B)$800,000C)$500,000D)$1,500,000E)None of the above

A division's after tax income is $450,000, its total assets are $5,000,000, and its current liabilities are $700,000. If its current EVA is $20,000, what is the weighted-average cost of capital?A)4.44%B)10.0%C)95.5%D)4.65%E)Cannot be determined
A strategy to improve delivery applies to which perspective under the balanced scorecard lens?A)Financial perspectiveB)Customer perspectiveC)Business process perspectiveD)Learning and growth perspectiveE)None of the above
A strategy to improve employee productivity applies to which perspective under the balanced scorecard lens?A)Financial perspectiveB)Customer perspectiveC)Business process perspectiveD)Learning and growth perspectiveE)None of the above
A strategy to improve shareholder perspectives applies to which perspective under the balanced scorecard lens?A)Financial perspectiveB)Customer perspectiveC)Business process perspectiveD)Learning and growth perspectiveE)None of the above
A strategy to increase orders from profitable customers applies to which perspective under the balanced scorecard lens?A)Financial perspectiveB)Customer perspectiveC)Business process perspectiveD)Learning and growth perspectiveE)None of the above
Which of the following is a difficulty of using a fully designed and functioning balanced scorecard?A)Assessing the importance that should be attached to each perspective.B)The technical hurdlers of measuring, quantifying and evaluating some of the qualitative components.C)A frequent lack of clarity and sense of direction from considering the large number of measures suggested by the four perspectives.D)The time and expense of maintaining a balanced scorecard can be significant.E)All of the above.

What are the disadvantages of residual income?

What is an advantage of the residual income performance measure?

What are the disadvantages of using ROI for performance measurement?

What is residual income as a performance measure?