Question

Which of the statements regarding performance measurements is false?

Multiple Choice

A The residual income approach cannot be used to compare the performance of divisions of

different sizes.

B Turnover is a measure of efficiency and refers to the number of dollars of sales generated by inventory sold.

C One of the weaknesses of using ROI for performance measurement is that it may induce managers to make cost-cutting decisions that jeopardize the long-term viability of the segment or corporation.

D Margin refers to the percentage of income or profit generated by each dollar

of sales.

Answer 1

Ans: is B Turnover is a measure of efficiency and refers to the number of dollars of sales generated by inventory sold.

It is false statement, because Turnover is not a measure of efficiency and refers to the number of dollars of sales generated by inventory sold.

Turnover is the total sales generated by a business in during a period. It's sometimes referred to as gross revenue. It is different to profit, which is a measure of earnings. Turnover is one of the key measures of a business’s performance. It is used whole life of the business, from planning, through measuring performance, to valuing a company in the event of a sale.

Different type of turnover are used in the business form measuring performance, such as inventory turnover, accounts receivable and payable turnover and total assets turnover.

Inventory turnover is a ratio showing how many times a company has sold and replaced inventory during a period.

**In the case of A The residual income approach cannot be used to compare the performance of divisions of different sizes, it is correct statement

>> Because, It is difficult to compare the performance of units of different sizes. A large unit would probably have a larger residual income than a small unit.

**In the case of C One of the weaknesses of using ROI for performance measurement is that it may induce managers to make cost-cutting decisions that jeopardize the long-term viability of the segment or corporation, it is correct statement.

>> Because, When a manager is evaluated using current ROI, the pressure to meet the current period’s ROI target may cause short-term profits to take priority over long-term profits. The manager give importance to division not to company as a whole. If a project ROI is higher than the company ROI, but lower than the division ROI ( the owner of decision making), in this situation the manager doesn’t take the project.

**In the case of D Margin refers to the percentage of income or profit generated by each dollar of sales. it is correct statement.

>>because margin is calculated through income or profits is divided by sales. The result is the percentage of sales as income or profit.

The profit margin is calculated by finding the net profit as a percentage of the sales revenue.

Profit margin = Profits / sales ( it is the formula for calculating margin)

Profit margin or income margin represents what percentage of sales revenue has turned into profits or income. Simply put, the percentage figure indicates how many cents of profit or income the business has generated for each dollar of sale.