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MCQs on Strategic Control
Performance Measurement is the process of assessing the proficiency with which a reporting entity succeeds, by the economic acquisition of resources. Here on MCQs.CLUB we have written easy Multiple-Choice Questions (MCQs) on Strategic Control that fully cover practice questions and quizzes on performance measurement, key performance index (kpi) with examples, types, meaning, techniques, process and definition, measuring organizational performance, strategic control system in strategic management. These MCQs on strategic control management and Performance Measurement are also helpful for competitive exams, professional accountancy exams and business management exams.
- Performance Measurement –
- The process of assessing the proficiency with which a reporting entity succeeds, by the economic acquisition of resources and their efficient and effective development, in achieving its objectives.
- Performance measures may be based on non-financial as well as on financial information.
- Both A&B
- None
- Inflation makes it harder to compare performance over time, as it affects accounting values, and hence measures of performance. It affects base line and comparative figures.
- True
- False
- Capital Projects – involve ‘any long-term commitments of funds undertaken now in anticipation of a potential inflow of funds at some time in the future’.
- True
- False
- Capital expenditure decisions should be based on an evaluation of future cash flows, discounted at an appropriate cost of capital to an NPV.
- True
- False
- Which of the following is correct?
- The basic concept of contribution can be used strategically if questions about strategic factors are examined in its light.
- Contribution Margin is ‘the difference between sales volume and the variable cost of those sales, expressed either in absolute terms or as a contribution per unit’.
- Contribution margins can be used for measuring performance in terms of breakeven analysis.
- All of the above
- A danger with contribution margin analysis is that firms in a competitive industry might be tempted to sell at prices which cover marginal costs, but fail to earn an adequate return on sunk fixed costs.
- The above statement is correct
- The above statement is incorrect
- Contribution margins can be used for measuring performance and as a tool for decision making.
- True
- False
- Which of the following is correct for Return on investment (ROI)?
- Return on investment (ROI) is a convenient measure, which ties in easily with the firm’s accounts.
- ROI does not easily account for risk.
- ROI is based on organisation structure, not business processes, and is only suitable to products at the mature phase of the life cycle.
- All of the above
- The main reasons for the widespread use of ROI as a performance indicator are:
- Financial reporting – It ties in directly with the accounting process, and is identifiable from the financial statements. Therefore, it is easy to investors to understand.
- Aggregation – ROI is a very convenient method of measuring the performance for a division or company as an entire unit.
- It can be used to compare divisions and to compare performance in divisions of different sizes.
- All of the above
- Return on investment (ROI) is based on organisational structure, not business processes, and is best suited to products at the mature phase of the life cycle.
- True
- False
- Which of the following is correct for Residual Income (RI)?
- Residual Income is ‘profit minus a charge for capital employed in the period’.
- An alternative way of measuring the performance of an investment centre, instead of using ROI, is residual income (RI).
- Residual income (RI) gets around some of the problems of ROI, by deducting an imputed interest charge for the use of assets from profits.
- All of the above
- Residual income will increase when:
- Investments earning above the cost of capital are undertaken
- Investments earning below the cost of capital are eliminated
- Both A&B
- None
- The advantages of using Residual Income (RI) are:
- Residual income is more flexible since a different cost of capital can be applied to investments with different risk characteristics.
- The cost of financing a division or an investment is highlighted to division managers through the use of the cost of capital figure.
- Both A&B
- None
- The weakness/disadvantage of RI is that it does not facilitate comparisons between investment or organisations of different sizes, because it uses an absolute figure rather than a percentage.
- True
- False
- Residual Income (RI) does not facilitate comparison between investment centres, nor does it relate the size of a centre’s income to the size of the investment.
- True
- False
- Profit centres are often compared. Problems arise when managers are judged on matters they cannot control. A profit centre manager might take decisions that will improve their own centre’s performance at the expense of other parts of the business.
- The above statement is correct
- The above statement is incorrect
- When comparing profit centres, managers should only be held accountable for those revenues and costs that they are in a position to control.
- True
- False
- Which of the profit concepts could be used to measure and report divisional profit internally within a company?
- Contribution
- Controllable profit – contribution minus all the division’s fixed costs controllable by the manager.
- Controllable margin – controllable profit minus all other costs directly traceable to the division.
- Net profit or net contribution, less a share of service centre costs and general management overhead.
- All of the above
- Interfirm comparisons are comparisons of the performance of:
- different companies
- subsidiaries
- investment centres
- All of the above
- The purpose of interfirm comparisons includes:
- Senior management can compare the performance of different subsidiary companies within their Group.
- A company’s status as a potential takeover target, or as a potential takeover threat, can be evaluated.
- One company can compare its performance against another, as part of competitive analysis or benchmarking.
- All of the above
- There are a number of basic requirements for an interfirm comparison to be successful such as:
- The companies compared must all belong to a similar industry to enable comparison.
- Reports might be given in the form of lists of ratios.
- The results of each of the participants must be adjusted so that, as far as possible, the same accounting policies are used for each.
- All of the above
- Ratios are useful in that they provide a means of comparison of actual results:
- With a budget, or desired target
- With ratios of previous years’ results, in order to detect trends
- With ratios of other companies or divisions
- With industry or governmental indices
- All of the above
- ‘Return’ might be taken as profit after tax. However, when interfirm comparisons are being made, this would be unsuitable because:
- The tax rate applicable to one company’s profits may be different from the tax rate applicable to another’s.
- One company might be financed largely by borrowing, receiving tax relief on interest payments. Another company might be entirely equity financed.
- Both A&B
- None
- A management team is required by an organisation’s shareholders to maximise the value of their investment in the organisation and a plethora of performance indicators is used to assess whether or not the management team is fulfilling this duty.
- The above statement is correct
- The above statement is incorrect
- Shareholder Value – is the ‘total return to the shareholders in terms of both dividends and share price growth, calculated as the present value of future free cash flows of the business discounted at the weighted average cost of the capital of the business less the market value of its debt’.
- The above definition is correct
- The above definition is incorrect
- Value based management – is ‘a managerial process which effectively links strategy, measurement and operational processes to the end of creating shareholder value’.
- True
- False
- Elements of Value based management (VBM) are:
- Strategy for value creation – ways to increase or generate the maximum future value for an organization
- Metrics – for measuring value
- Management – managing for value, encompassing governance, remuneration, organisation structure, culture and stakeholder relationships
- All of the above
- A comprehensive VBM programme should consider:
- Strategic planning – strategies should be evaluated to establish whether they will maximise shareholder value.
- Capital allocation – funds should be allocated to the strategies and divisions that will create most shareholder value.
- Operating budgets – budgets should reflect the strategies the organisation is using to create value.
- Performance measurement – the economic performance of the organisation needs to lead to increases in share prices, because these promote the creation of shareholder wealth.
- Management remuneration – rewards should be linked to the value drivers, and how well valuebased targets are achieved.
- Internal communication – the background to the programme and how VBM will benefit the business need to be explained to staff.
- External communication – management decisions, and how they are designed to achieve value, must be communicated to the market.
- (I) (III) (V) and (VI) only
- (II) (III) (IV) and (VII) only
- Both A&B
- None
- Economic value added (EVA) –
- Economic value added (EVA) tries to overcome the problems of accounting profit as the basis of performance measurement, by using economic profit.
- A measure which approximates a company’s profit. Traditional financial statements are translated into EVA statements by reversing distortions in operating performance created by accounting rules and by charging operating profit for all of the capital employed.
- Both A&B
- None
- The principles of EVA are that:
- Investment leads to assets regardless of accounting treatments
- Assets once created cannot be diminished by accounting action
- Both A&B
- None
- Which of the following is correct?
- EVA gives an absolute measure, rather than a percentage value of performance.
- If EVA is positive it indicates an organisation is generating a return greater than that required by the providers of finance.
- Both A&B
- None
- The advantages of EVA include:
- The EVA measure is an absolute value, which is easily understood by nonfinancial managers.
- The adjustments within the calculation of EVA mean that the measure is based on figures that are closer to cash flows than accounting profits.
- Both A&B
- None
- The drawbacks of EVA include:
- EVA is based on historical accounts, which may be of limited use as a guide to the future.
- Making the necessary adjustments can be problematic as sometimes a large number of adjustments are required.
- Both A&B
- None
- Market value added (MVA) –
- Market value added (MVA) is the difference between the market value of a company and the economic book value of capital employed.
- MVA is assumed to be the market’s assessment of the firm’s ability to add value in the future.
- Market value added is ‘the difference between a company’s market value (derived from share price) and its economic book value.
- All of the above
- Total shareholder return (TSR) is the total percentage return to shareholders over a given period.
- True
- False
- Which of the following factors could affect performance in foreign subsidiaries or operations?
- Government policy – There will be differences in the levels of grants or concessions from the national government and in the rate of taxation and interest.
- Risk – Some overseas operations may be a greater risk than others so that higher returns may be required from them.
- Life cycle – The same product may be at different stages in its product life cycle in each country.
- All of the above
- If the firms or subsidiaries being compared operate in different countries there will be certain problems for performance measurement such as:
- Considerable friction and difficulty in measuring performance can be caused by the use of inappropriate currency conversion rates.
- Realistic standards – It may be difficult to establish realistic standards for each different country.
- Both A&B
- None
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