Solutions Manual For

Solutions Manual For Cost Accounting (Global Edition) 14 th Edition By Horngren Srikant Madhav Rajan (All Chapters 1-23, 100% Original Verified, A+ Grade) All Chapters Arranged

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23-1

CHAPTER 23

PERFORMANCE MEASUREMENT, COMPENSATION, AND

MULTINATIONAL CONSIDERATIONS

23-1 Examples of financial and nonfinancial measures of performance are:

Financial: ROI, residual income, economic value added, and return on sales.

Nonfinancial: Customer perspective: Market share, customer satisfaction.

Internal-business-processes perspective: Manufacturing lead time, yield,

on-time performance, number of new product launches, and number of new patents filed.

Learning-and-growth perspective: employee satisfaction, information-

system availability.

23-2 The three steps in designing an accounting-based performance measure are:

• Choose performance measures that align with top management’s financial goals
• Choose the details of each performance measure in Step 1, including the time horizon and

measurement of various aspects of the measure

• Choose a target level of performance and feedback mechanism for each performance

measure in Step 1

23-3 The DuPont method highlights that ROI is increased by any action that increases return

on sales or investment turnover. ROI increases with:

• increases in revenues,
• decreases in costs, or
• decreases in investments,

while holding the other two factors constant.

23-4 Yes. Residual income (RI) is not identical to return on investment (ROI). ROI is a percentage with investment as the denominator of the computation. RI is an absolute monetary amount which includes an imputed interest charge based on investment.

23-5 Economic value added (EVA) is a specific type of residual income measure that is

calculated as follows:

Economic value added (EVA) = After-tax operating income – () Total assets minusWeighted-average cost of capitalcurrent liabilities ×

23-6

Definitions of investment used in practice when computing ROI are:

• Total assets available
• Total assets employed
• Total assets employed minus current liabilities
• Stockholders’ equity
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23-2 23-7 Current cost is the cost of purchasing an asset today identical to the one currently held if an identical asset can currently be purchased; it is the cost of purchasing an asset that provides services like the one currently held if an identical asset cannot be purchased. Historical-cost- based measures of ROI compute the asset base as the original purchase cost of an asset minus any accumulated depreciation.Some commentators argue that current cost is oriented to current prices, while historical cost is past-oriented.

23-8 Special problems arise when evaluating the performance of divisions in multinational companies because

• The economic, legal, political, social, and cultural environments differ significantly

across countries.

• Governments in some countries may impose controls and limit selling prices of

products.

• Availability of materials and skilled labor, as well as costs of materials, labor, and

infrastructure may differ significantly across countries.

• Divisions operating in different countries keep score of their performance in different

currencies.

23-9 In some cases, the subunit’s performance may not be a good indicator of a manager’s performance. For example, companies often put the most skillful division manager in charge of the weakest division in an attempt to improve the performance of the weak division. Such an effort may yield results in years, not months. The division may continue to perform poorly with respect to other divisions of the company. But it would be a mistake to conclude from the poor performance of the division that the manager is performing poorly.A second example of the distinction between the performance of the manager and the performance of the subunit is the use of historical cost-based ROIs to evaluate the manager even though historical cost-based ROIs may be unsatisfactory for evaluating the economic returns earned by the organization subunit. Historical cost-based ROI can be used to evaluate a manager by comparing actual results to budgeted historical cost-based ROIs.

23-10 Moral hazard describes situations in which an employee prefers to exert less effort (or to report distorted information) compared with the effort (or accurate information) desired by the owner because the employee’s effort (or validity of the reported information) cannot be accurately monitored and enforced.

23-11 No, rewarding managers on the basis of their performance measures only, such as ROI, subjects them to uncontrollable risk because managers’ performance measures are also affected by random factors over which they have no control. A manager may put in a great deal of effort but her performance measure may not reflect this effort if it is negatively affected by various random factors. Thus, when managers are compensated on the basis of performance measures, they will need to be compensated for taking on extra risk. Therefore, when performance-based incentives are used, they are generally more costly to the owner. The motivation for having some salary and some performance-based bonus in compensation arrangements is to balance the benefits of incentives against the extra costs of imposing uncontrollable risk on the manager.

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23-3 23-12 Benchmarking or relative performance evaluation is the process of evaluating a manager’s performance against the performance of other similar operations. The ideal benchmark is another operation that is affected by the same noncontrollable factors that affect the manager’s performance. Benchmarking cancels the effects of the common noncontrollable factors and provides better information about the manager's performance.

23-13 When employees have to perform multiple tasks as part of their jobs, incentive problems can arise when one task is easy to monitor and measure while the other task is more difficult to evaluate. Employers want employees to intelligently allocate time and effort among various tasks. If, however, employees are rewarded on the basis of the task that is more easily measured, they will tend to focus their efforts on that task and ignore the others.

23-14

Disclosures required by the Securities and Exchange Commission are:

• A summary compensation table showing the salary, bonus, stock options, other stock

awards, and other compensation earned by the five top officers in the previous three years

• The principles underlying the executive compensation plans, and the performance

criteria, such as profitability, sales growth, and market share used in determining compensation

• How well a company’s stock performed relative to the stocks of other companies in

the same industry

23-15 The four levers of control in an organization are diagnostic control systems, boundary systems, belief systems and interactive control systems.• Diagnostic control systems are the set of critical performance variables that help managers track progress toward the strategic goal. These measures are periodically monitored and action is usually only taken if a measure is outside its acceptable limits.• Boundary systems describe standards of behavior and codes of conduct expected of all employees, particularly by defining actions that are off-limits. Boundary systems prevent employees from performing harmful actions.• Belief systems articulate the mission, purpose and core values of a company. They describe the accepted norms and patterns of behavior expected of all managers and other employees with respect to each other, shareholders, customers and communities.• Interactive control systems are formal information systems that managers use to focus an organization's attention and learning on key strategic issues. They form the basis of ongoing discussion and debate about strategic uncertainties that the business faces and help position the organization for the opportunities and threats of tomorrow.

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