Certified Management Accountant Performance Measurement 3 — Questions and Answers
Question 1: A company's ROI is 15% but its hurdle rate is 20%. A divisional manager using ROI will likely:
- Accept all projects above the hurdle rate
- Reject projects that would benefit the company overall (Correct answer)
- Accept projects with ROI below divisional average
- Approve projects that lower divisional ROI above the hurdle rate
Correct answer: Reject projects that would benefit the company overall
A manager evaluated on ROI rejects projects that would lower divisional ROI even if those projects exceed the company's required return.
Question 2: Under a cost center structure, management is held responsible for:
- Revenue and costs only
- Costs only (Correct answer)
- Return on investment
- Revenue, costs, and asset utilization
Correct answer: Costs only
Cost center managers control only costs; they have no authority over revenue generation or capital investment.
Question 3: Which transfer pricing method uses the external selling price minus a normal profit margin for the buying division?
- Cost-plus method
- Market-based method
- Resale price method (Correct answer)
- Comparable uncontrolled price method
Correct answer: Resale price method
The resale price method starts with the external resale price and deducts an appropriate gross margin to arrive at the transfer price.
Question 4: Kaplan and Norton's Strategy Map is used in conjunction with the balanced scorecard to show:
- Detailed budget variances by quarter
- Cause-and-effect relationships between strategic objectives (Correct answer)
- Competitor benchmarking data
- Headcount allocations across departments
Correct answer: Cause-and-effect relationships between strategic objectives
A strategy map visualizes the cause-and-effect linkages between objectives across all four balanced scorecard perspectives.
Question 5: Economic value added (EVA) can be increased by all of the following EXCEPT:
- Improving net operating profit after tax (NOPAT)
- Reducing the weighted average cost of capital
- Investing in projects that earn above the cost of capital
- Increasing invested capital without changing NOPAT (Correct answer)
Correct answer: Increasing invested capital without changing NOPAT
Adding invested capital increases the capital charge, which reduces EVA if NOPAT does not increase proportionally.
Question 6: A service department cost is allocated to operating divisions based on budgeted usage rather than actual usage primarily to:
- Reward divisions that use more services
- Protect operating divisions from service department inefficiencies (Correct answer)
- Simplify the accounting entries
- Maximize total cost allocated across divisions
Correct answer: Protect operating divisions from service department inefficiencies
Allocating based on budgeted usage prevents operating divisions from absorbing variances caused by the service department's own cost overruns.
Question 7: When using the Du Pont analysis, a company can improve ROI by increasing asset turnover while holding profit margin constant. This means the company:
- Raised its selling prices
- Generated more revenue per dollar of assets (Correct answer)
- Reduced its tax expense
- Increased its financial leverage
Correct answer: Generated more revenue per dollar of assets
Higher asset turnover means the same asset base is producing more revenue, improving ROI without a margin change.
Certified Management Accountant Performance Measurement 3
A company's ROI is 15% but its hurdle rate is 20%.
A divisional manager using ROI will likely: