Tb10

CHAPTER 10: CONTROLLING IN ORGANIZATIONS

Test Correlation Table Question Types/Level of Difficulty

LEARNING OBJECTIVES Easy Moderate Difficult

1. Explain the foundations of control.

TF 1, 3 2, 4, 5, 7 6

MC 1, 5, 7, 10, 13, 16, 23, 24, 34

2, 6, 8, 9, 11, 12, 14, 15, 17, 18, 19, 21, 22, 25, 26, 28, 29, 32,

33, 34, 35

3, 4, 20, 27, 30, 31, 36, 37

ES — 1, 2, 3 —

2. Identify the six phases of the corrective control model.

TF 10, 11, 13, 15, 16

8, 9, 17, 18 12, 14, 19

MC 39, 43, 49, 51 38, 42, 44, 45, 46, 50

40, 41, 47, 48

ES — 5 4

3. Describe the primary methods of organizational control.

TF 21, 26 20, 22, 23, 24, 28

25, 27, 29, 30

MC 58, 77, 79, 81, 84, 87, 93, 98,

100

52, 53, 54, 56, 59, 60, 61, 62, 63, 64, 65, 67, 68, 69, 70, 71, 72, 73, 74, 78, 80, 82, 83, 85, 86, 88, 91, 92,

96, 97

55, 60, 66, 75, 76, 89, 90, 92,

94, 95, 99

ES — 7 6

4. Explain several key corporate governance issues and control mechanisms.

TF 33, 34, 36 31, 32, 35, 38 37, 39

MC 101, 106, 108, 110

102, 103, 107, 109, 111

104, 105, 112

ES — 8, 9 —

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True/False Questions

Learning Objective 1

1. Control involves the processes for ensuring that behaviors and performance conform to an organization’s standards, including rules, procedures, and goals.

ANSWER: T, Knowledge, Easy, p. 266

2. Planning prescribes actual behaviors and results, while controls maintain desired behaviors and results.

ANSWER: F, Knowledge, Moderate, p. 267

3. In most modern corporations, planning and control are substitutes for each other.

ANSWER: F, Knowledge, Easy, p. 267

4. There are four primary sources of control in most organizations.

ANSWER: T, Knowledge, Moderate, p. 268

5. Pressure from a union for an organization to change is an example of shareholder control.


6. Group control comprises formal policies, rules, and procedures for preventing or correcting deviations from plans.

ANSWER: F, Knowledge, Difficult, p. 269

7. Employee relationship software at Siebel Systems makes first-line managers accountable by putting them in control of setting departmental goals.

ANSWER: F, Knowledge, Moderate, pp. 269–270


8. The corrective control model detects deviations from established standards.


9. The first step in the corrective control model is to identify the key characteristics to be measured.


10. Pareto's law holds that multinational firms should think globally but act locally.


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11. There are five functional areas of controls performance standards.


12. When formal controls put an emphasis on rewards, group controls may emerge to distort any negative information reported to management.


13. Most customers are not satisfied with the ways organizations handle their complaints.


14. Barclays Bank zero defects culture teaches workers that although mistakes are inevitable, they are not acceptable.


15. The corrective control model is a process for detecting and eliminating or reducing deviations from an organization’s established standards.


16. A formal control subsystem might be created and maintained for an employee, a department, or an entire organization.


17. The principle of selectivity is also known as Pareto’s law.


18. Rules are criteria for evaluating qualitative and quantitative characteristics and should be set for each characteristic measured.


19. When identifying the key characteristics needed for efficient operations, a manager decides that it is important to determine if there is a difference between what is happening at the company and what should be happening. This manager is involved in the fifth step of the corrective control model.

ANSWER: T, Application, Difficult, p. 275


20. The text discusses six primary types of organizational control: mechanistic, organic, market, financial, accounting, and automation.


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21. Organic controls rely on a centralized authority structure.


22. Market controls emerged from economics.


23. Budget control includes the mechanisms for preventing or correcting the misallocation of resources.


24. Ratio analysis involves selecting two significant figures, expressing their relationship as a fraction, and comparing its value for two periods of time or with the same ratio of similar organizations.


25. Denise Logan is a manager at Nextel. Recently she has been informed that some of the telephone operators have been very rude to customers seeking assistance. In order to confirm whether or not this is true, Logan approves of a plan to randomly record the conversations of her operators. This is known as customer monitoring.

ANSWER: F, Application, Difficult, p. 279

26. Budgeting is a form of financial control.


27. Activity-based costing is one of the less essential forms of accounting control.


28. A sales budget is a forecast of the expected flow of monetary receipts and expenditures.


29. The cost view of activity-based costing reflects the flow of costs from resources to activities and from activities to products and services.

ANSWER: T, Knowledge, Difficult, p. 282

30. One limitation of activity-based accounting is that managers must still make some arbitrary cost allocations based on volume.

ANSWER: T, Knowledge, Difficult, p. 285

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31. Proxy statements are governance rules for a corporation that are adopted by its board of directors.


32. Proxy statements are internal control mechanisms.


33. Conflicts of interest are included in the general provisions of the Sarbanes-Oxley Act.


34. Edgar Fleester could be imprisoned for up to 20 years if convicted for falsifying corporate records.

ANSWER: T, Application, Easy, p. 288

35. An independent board of directors member would be a person who has never worked for the company.


36. The board of directors is responsible if executives are allowed to be overpaid.


37. Fiduciary responsibility indicates that final authority resides with the courts and congress.


38. Board of directors member Wendy Applegate has a duty to exercise fiduciary responsibility. This means that she can be fined or imprisoned if convicted of corporate crimes.

ANSWER: F, Application, Moderate, p. 289

39. The designation of “independent” Audit Committee members at Newell Rubbermaid means that the board of directors cannot remove Audit Committee members from office.


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Multiple Choice Questions

Preview1. Instituting effective managerial controls at Waste Management led to all of the following

achievements except:a. reduction of company debt by 33 percent.b. hiring of higher quality employees.c. becoming the largest in its industry.d. increasing its stock value by 85 percent.

ANSWER: B, Knowledge, Easy, p. 266

2. Waste Management CEO Maurice Myers reestablished the position of ethics officer as a __________.a. credibility strategyb. stakeholder controlc. compliance strategyd. preventative control

ANSWER: D, Knowledge, Moderate, p. 266

3. The new CEO of Waste Management discovered a big control problem in __________. a. no safety records being keptb. not knowing how many trucks they ownedc. poor relations with large companies they had acquiredd. unproductive high seniority employees that should be fired

ANSWER: A, Knowledge, Difficult, p. 266


Foundations of Control4. Jared Hanson is the manager of a group of convenience stores. He has installed

surveillance cameras on the fuel pump islands. For Jared, video monitoring is a means of __________ customers.a. controlling b. restraining c. manipulatingd. watching

ANSWER: A, Application, Difficult, pp. 266–267

5. Since the September 11, 2001 attacks, governments and businesses have substantially increased their use of __________ controls.a. preventiveb. correctivec. security-basedd. profile-based

ANSWER: C, Knowledge, Easy, pp. 266–267

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6. Controls help maintain or redirect __________ behaviors and results.a. planned b. desired c. actuald. forecasted

ANSWER: C, Knowledge, Moderate, p. 267

7. ___________ involves the processes for ensuring that behaviors and performance conform to an organization’s standards, including rules, procedures, and goals.a. Organizational structureb. Monitoring c. Controld. Planning

ANSWER: C, Knowledge, Easy, p. 266

8. The need for controls can be illustrated in the way control interacts with planning. One example of this interaction is the fact that planning prescribes __________ behaviors while controls help to maintain or redirect _________ behaviors.a. desired; actual b. correct; incorrect c. process-oriented; result-orientedd. long-term; short-term

ANSWER: A, Knowledge, Moderate, p. 267

9. According to the text, control systems in organizations __________.a. have a negative connotation to most peopleb. are both useful and necessaryc. should interact with planning activitiesd. all of the above

ANSWER: D, Knowledge, Moderate, pp. 266–267

10. Latoya Elliott is concerned that her company needs to take some steps to ensure that the actions of workers conform to the expectations of the company. Latoya is advocating the implementation of a(n) __________.a. automated network b. stakeholder education program c. control systemd. none of the above

ANSWER: C, Application, Easy, p. 266

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11. Mechanisms that are intended to reduce errors and thereby minimize the need for corrective action are known as __________ controls.a. predictive b. invasive c. preventived. organic


12. All of the following are given in the text as examples of preventive controls except __________.a. rules and regulationsb. recruitment and selection proceduresc. training and development programsd. early retirement incentives


13. __________ controls are mechanisms intended to reduce or eliminate unwanted behaviors or results and thereby achieve conformity with the organization’s regulations and standards.a. Reactive b. Interactivec. Punitived. Corrective

ANSWER: D, Knowledge, Easy, p. 267

14. Rosa Sanchez works as a manager at a diamond mine. Because there is a great incentive for the miners to steal some of the diamonds they find, Sanchez spends a great deal of time and effort recruiting, selecting, and training only those workers who are less likely to steal from the firm. Sanchez is relying on __________ controls.a. corrective b. preventivec. organicd. machine

ANSWER: B, Application, Moderate, p. 267

15. Donna Norman has been given the responsibility to reduce behaviors of employees that are outside of those allowed by company rules and regulations. Norman will probably rely on __________ controls.a. recruitment b. financialc. correctived. stakeholder

ANSWER: C, Application, Moderate, p. 267

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16. Waste Management tracked data on customer complaints and truck driver accidents as input for __________.a. corrective controlsb. preventive controlsc. individual controlsd. cost-benefit controls

ANSWER: A, Knowledge, Easy, p. 267

17. __________ is (are) not one of the four primary sources of control in most organizations.a. Competitors b. Stakeholdersc. The organization itselfd. Groups


18. __________ control refers to pressures on organizations from outside sources, such as governmental agents and customers, to change the organization’s behaviors.a. Consensus b. Media c. Shareholderd. Stakeholder


19. Recently a consumer watch organization sued a television network for knowingly misinforming the public with its investigative reports on a U.S. manufacturer. Thus, the television network is feeling the effects of __________ controls.a. shareholder b. stakeholder c. financiald. political


20. McDonald's redesigned packaging is an example of organizational response to __________.a. greenmailb. green marketingc. environmentalismd. the EPA

ANSWER: B, Knowledge, Difficult, p. 268

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21. At Xyllar University, the management class is required to write a ten-page term paper. Xiang Lee and his friends discovered that two of his classmates were cheating by using term papers written by other students in other courses. Instead of telling the teacher, Lee and his friends confronted the two students and convinced them not to cheat. This type of control is best described as a(n) __________ source of control.a. organizational b. organicc. groupd. ethical


22. The formal rules and procedures for preventing or correcting deviations from plans and for achieving desired goals is also known as a(n) __________ control.a. community b. stakeholderc. proactived. organizational


23. A(n) __________ control refers to the norms and values that team members share and maintain through rewards and punishments.a. peer-pressureb. adaptive reinforcement c. groupd. behavioral


24. __________ control consists of the guiding mechanisms that operate consciously and subconsciously within each person.a. Moral b. Ethical c. Individual self-d. Self-actualization


25. One way to assess the amount of needed formal organizational controls is to examine __________.a. appropriatenessb. objectivenessc. costs and benefitsd. acceptability


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26. ERM software at Siebel Systems is specifically targeted at __________.a. manufacturing operationsb. employeesc. executivesd. marketing cost-benefit

ANSWER: B, Knowledge, Moderate, pp. 269–270

27. A major criticism of employee relationship management (ERM) is __________.a. overly structured systems reduce creativityb. top-down organizational controls stifle individual self-control c. insufficient linkage is made to strategic goals of the organizationd. All of the above are criticisms of ERM software.


28. One way to develop effective, formal organizational controls is to use a cost-benefit analysis. A cost-benefit analysis addresses each of the following questions except __________.a. For what desired behaviors and results should organizational controls be

developed?b. What are the costs and benefits of the control system required to achieve the

organization’s desired behaviors and results?c. What chance does a competitor have of creating a better control system?d. What are the costs and benefits associated with alternative control systems?


29. The cost-benefit model suggests that __________.a. benefits increase as controls increaseb. costs outweigh benefits if a group control is used when an organizational control

was neededc. beyond a certain point, effectiveness declines with increases in the amount of

control exercised d. effectiveness and costs are not related


30. In the cost-benefit model, the vertical axis indicates the relationship between costs and benefits of control, ranging from __________ to __________.a. stable, unstable b. zero, high c. unprofitable, profitable d. inefficient, efficient


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31. In the cost-benefit model, the horizontal axis indicates the amount of organizational control, ranging from ________ to _________.a. low, highb. negligible, extreme c. bureaucratic, organicd. moderate, excessive


32. After calculating the savings and expenditures related to the implementation of a new computer assembly machine, Murdock Construction Company realized that after a certain point adding any more machines would actually result in a decrease in profitability. Murdock Construction probably made this determination using a(n) __________.a. pay-down chart b. expert system c. cost-benefit analysisd. proforma balance sheet


33. To be effective, control systems should be __________.a. timelyb. objective c. completed. all of the above

ANSWER: D, Knowledge, Moderate, pp. 270–271

34. A(n) __________ control is impartial and cannot be manipulated by employees for personal gain.a. ethical b. objective c. legitimated. standardized


35. __________ controls are recognized as necessary and appropriate.a. Legitimate b. Acceptable c. Bureaucraticd. Unqualified

ANSWER: B, Knowledge, Moderate, p. 271

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36. Max Wilhelm is the CEO of the MCW Corporation. At the annual banquet, Wilhelm praised the supervisor of the marketing division for minimizing costs through reducing errors at work. Wilhelm said the marketing department completely met all its projected goals by providing objective rules that were applied in a timely manner. Thus, only the __________ criterion for effective control systems was not mentioned.a. subjectivity b. acceptability c. ethicald. financial

ANSWER: B, Application, Difficult, pp. 270–271

37. Cost-benefit analysis addresses __________ basic questions.a. two b. threec. fived. ten



Corrective Control Model38. The __________ is a process for detecting and eliminating or reducing deviations from

an organization’s established standards.a. punitive reinforcement scale b. corrective control model c. adaptive result processd. organic control system


39. The corrective control model involves __________ interconnected steps.a. three b. fivec. sixd. ten


40. The third step in the corrective control model involves __________.a. making comparisonsb. collecting informationc. setting standardsd. creating a strategic plan

ANSWER: C, Knowledge, Difficult, p. 272

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41. The fifth step in the corrective control model involves __________.a. defining the subsystemb. identifying key characteristics to be measuredc. receiving approval from top managementd. making comparisons

ANSWER: D, Knowledge, Difficult, p. 272

42. All of the following are steps in the corrective control model except __________.a. collecting information b. defining the systemc. setting goalsd. identifying key characteristics to be measured


43. Formal controls might be created and maintained for all of the following except __________.a. an employee b. a competitorc. a work teamd. an entire organization


44. The __________ holds that a small number of characteristics always account for a large number of effects.a. 10/90 rule b. principle of large numbers c. Peter principled. principle of selectivity


45. Many global organizations have adopted the strategy of __________.a. evaluating qualitative standards for each countryb. thinking globally but acting locallyc. integrating cross-cultural differences into their standardsd. all of the above


46. According to the text, __________ standards are increasingly being used as a base for control systems.a. diversity b. legal c. performanced. ethical


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47. Rocky Swanson is involved in an attempt to reduce absenteeism at Sprocket Manufacturing. At present, he is identifying the key characteristics that need to be measured before corrective actions can be taken. Rocky is in the __________ stage of the corrective control model.a. first b. second c. thirdd. fourth

ANSWER: B, Application, Difficult, p. 273

48. Abdul Rafanjani has been assigned to create a set of corrective controls that will help to eliminate high theft rates by employees at the Charpon Company. He has already defined the system of concern and identified the key characteristics that need to be measured. __________ is the next step Rafanjani should take.a. Consulting with an attorneyb. Collecting information about competitor operationsc. Setting standardsd. Diagnosing problems and making corrections

ANSWER: C, Application, Difficult, p. 273

49. In the process of creating corrective controls, Jake Horton needs to determine whether there is a difference between what is happening and what should be happening in his department at work. Horton is __________.a. setting standardsb. performing a cost-benefit analysis c. relying on group normsd. making comparisons

ANSWER: D, Application, Easy, p. 275

50. Which of the following is not part of Barclays Bank’s complaint management process?a. Customers are encouraged to complain. b. Complaints are acknowledged within 24 hours.c. Reply with full explanation is made within 5 working days.d. All of the above are included in Barclays’ process.


51. Top management at Barclays Bank views complaints as __________.a. a necessary evilb. a contributor to their long-term successc. a method to evaluate employee performanced. something to be avoided


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Primary Methods of Control52. The text describes __________ primary types of organizational control.

a. three b. sixc. eightd. ten


53. The six primary types of organizational controls include all of the following except __________.a. mechanistic and organic b. financial c. legald. automation


54. __________ controls involve extensive rules and procedures, top-down authority, and tightly written job descriptions.a. Mechanisticb. Adaptive c. Objectived. Authoritative


55. Rebecca Lockhart owns a company that relies on extensive rules and procedures, top-down authority, and tightly written job descriptions. Lockhart’s company could be described as using __________ organizational controls.a. financial b. organicc. tacticald. mechanistic

ANSWER: D, Application, Difficult, p. 277

56. Carla Lorek at Xerox predicts that a(n) __________ approach will cause workers to drive up numbers without putting effort into quality.a. financialb. mechanisticc. organicd. market


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57. __________ controls include flexible authority, relatively loose job descriptions, and individual self-controls.a. Organicb. Subjective c. Mechanisticd. Objective


58. __________ controls are consistent with a clan culture.a. Market b. Accounting c. Financiald. Organic


59. Peachtree Savings and Loan just established a rule that branch managers are evaluated based on the ratio of nonperforming loans to total branch assets. This type of rule is indicative of a(n) __________ type of organizational control.a. mechanistic b. organic c. prescriptived. market

ANSWER: D, Application, Moderate, p. 278

60. The idea of market controls emerged from __________.a. mathematics b. sociology c. economicsd. management theory


61. __________ controls involve the use of data to monitor sales, prices, costs, and profits to guide decisions and evaluations.a. Activity-based b. Opportunistic c. Stakeholderd. Market


62. Market controls generally require that the __________.a. inflation rate is below 30 percentb. amount of governmental regulation be minimalc. costs of the resources used in producing outputs be measured monetarilyd. prices of the goods and services produced be set by governmental committees


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63. Garrett Cullen owns a small business, and he thinks that the U.S. is not making good financial decisions. Specifically, Cullen predicts a period of inflation will occur within the next seven years due to a high federal deficit, skyrocketing costs for entitlement programs, and a global loss of confidence in the U.S. government’s conviction to make appropriate cuts in spending. As a result, he decides to move his company overseas to cut costs and limit the risk associated with operating in the United States. Cullen used __________ controls to make this decision.a. politicalb. multidomestic c. mechanistic d. market

ANSWER: D, Application, Moderate, p. 278

64. __________ provide employees with supplemental income based on the profitability of an entire organization or a selected subunit.a. Profit-sharing plansb. Employee stock ownership plansc. Bonus-sharing plansd. Gain-sharing plans


65. The four goals that profit-sharing plans generally have include all of the following except __________.a. increasing employee identification with the profit goals of the organizationb. achieving a more flexible wage structurec. attracting and retaining employees more easilyd. increasing the financial performance of the organization


66. In order for profit-sharing plans to achieve their goals, employees must do all of the following must occur except __________.a. believe that the plan is based on a reasonable and equitable formulab. believe that their efforts contribute to profitabilityc. have a hand in the creation of the profit-sharing pland. believe that the size of profit-based incentives will increase proportionally as

profitability increases


67. Efforts to obtain feedback from customers concerning the quality of goods and services provided by a firm are ___________.a. considered in activity-based controls b. referred to as benchmarkingc. often used to intimidate competitorsd. referred to as customer monitoring


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68. __________ controls refer to the mechanisms for preventing or correcting the misallocation of resources.a. Market b. Financial c. Operationald. Strategic


69. The primary responsibility of external auditors is to the __________.a. top managementb. IRSc. shareholdersd. government

ANSWER: C, Knowledge, Moderate, pp. 279–280

70. Which of the following is not an example of a financial control mechanism?a. comparative financial analysisb. output-based costingc. activity-based costingd. budgeting


71. Evaluation of a firm’s financial condition for two or more time periods is called __________.a. zero based budgeting b. sales budgetingc. comparative financial analysisd. competitive financial analysis


72. The most common method of comparative financial analysis is __________.a. ratio analysisb. budget analysisc. multi-unit comparisonsd. accounting analysis


73. Gino Austin is the Executive Vice President of Retailing for the Southern Region of Wal-Mart. Gino compares the financial records for all of the stores in the Southern Region for ____________ purposes.a. budgeting b. inventory c. controld. advertising


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74. __________ is generally considered to be the most important profitability ratio because it indicates how efficiently the organization is using its resources. a. Return on investment b. The current ratio c. Inventory turnoverd. Return on sales


75. If a company has a current ratio of _________, it should be financially sound.a. 1:1b. 2:1c. 1:2d. 0.50


76. Danielle Jarrett is the owner of Designer Boutique. Her store has an inventory turnover ratio of about 10 (unusually high for this type of business). Which of the following statements is not true?a. This ratio suggests efficient operations.b. This suggests a relatively small amount of money is tied up in inventory.c. This suggests that Cheryl may be able to use some of her resources elsewhere.d. A ratio of 10 means that Cheryl has $10 in sales for every $1 of total assets.

ANSWER: D, Application, Difficult, p. 280

77. __________ is computed to assess an organization’s ability to meet its long-term financial commitments.a. Debt ratiob. Equity ratioc. Asset ratiod. Sales ratio


78. A new company has a debt ratio of 0.35. What does this mean?a. The company has $0.35 in assets for every $1.00 of liabilities.b. The company has $0.35 in liabilities for every $1.00 of assets.c. The company has $0.35 in sales for every $1.00 of liabilities.d. The company has $0.35 in liabilities for every $1.00 of sales.


79. __________ is the process of categorizing proposed expenditures and linking them to goals.a. Planningb. Stewardshipc. Administrationd. Budgeting

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80. Which of the following is not one of the primary purposes of budgeting?a. to help in planning work effectivelyb. to assist in allocating resourcesc. to enable a manager to dominate his competitiond. to aid in controlling and monitoring resource utilization


81. A(n) __________ budget targets spending for the refinement or development of products, materials, and processes.a. engineering b. inventory c. research and developmentd. patent


82. Budgets based on the number of individuals and dollars for each job category are usually known as __________ budgets.a. recruitment b. selection c. uniond. labor


83. __________ budgets focus on the expected flow of monetary receipts and expenditures and are usually developed at least once a year for each month of the year.a. Revenue b. Cash c. Salesd. Net Income


84. Carlyle Corporation decided to increase its spending on activities related to creating a more efficient version of its best selling product. This increase in spending is likely to be found in the __________ budget.a. marketing b. public relations c. research and developmentd. information systems

ANSWER: C, Application, Easy, p. 282

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85. Gattis & Glenwood, Inc. decided that it wanted to downsize by reducing the number of middle managers employed by the firm by 10 percent over the next 3 years. This projection should be specifically detailed in the __________ budget.a. raw materials b. laborc. financiald. accounting


86. Kathryn Yang has made plans to add a new warehouse to her moving and storage business next year. Most likely, the spending for this project is contained in her __________ budget.a. warehouseb. planningc. capitald. cash


87. A(n) __________ is a forecast of expected revenues, generally stated by product line on a monthly basis and revised at least annually.a. revenue budgetb. sales budgetc. income budgetd. linear regression analysis


88. __________ costing is a system that focuses on activities as the fundamental cost centers.a. Inventory-centered b. Geographically-separated c. Activity-basedd. Stakeholder-driven


89. In activity-based costing, an activity is described as any event that is a cost driver. All of the following were given in the text as examples of cost drivers except __________.a. energy consumed b. miles driven c. computer hours loggedd. All of the above are cost drivers.


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90. Information that is generated in an activity-based accounting system can be viewed from two different perspectives. The ___________ view reflects the lateral flow from costs of input information to activities and from activities to performance evaluation.a. profit-center b. cost-centerc. primary-inputd. process


91. The __________ reflects the lateral flow from costs of input information to activities and from activities to performance evaluation, or the observed transactions associated with an activity. a. cost view b. activity viewc. bureaucratic controlsd. process view


92. The managers of the Hospice of Central Kentucky used activity-based costing (ABC) to accomplish all of the following except ______________.a. communicate the need to cut costsb. manage the hospice more effectively c. reduce the death rate of terminally ill patientsd. negotiate more favorable rates from insurance carriers


93. When the Hospice of Central Kentucky changed over to activity-based costing, the cost categories translated to terminology that was more __________.a. commonb. itemizedc. technicald. coded


94. Benefits of using activity-based accounting include all of the following except ________.a. costs are pinpointed by activity instead of being charged to overheadb. cost allocations are based on the portion of activities that can be directly traced to a

finished productc. allocation of costs can be traced to the volume of productiond. costs associated with an activity for a particular product can now be traced


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95. Valery Murphy is a division manager for a large computer manufacturing company. It has been determined that Murphy’s division has operating costs that are 50 percent greater than similar divisions of competitor organizations. To reduce the waste in her division, Murphy decides to install a system that focuses on identifying specific cost centers in an organization. This type of system is frequently referred to as __________.a. profit-center marketing b. activity-based costing c. performance-related analysisd. waste-reduction controls

ANSWER: B, Application, Difficult, p. 282

96. High measurement costs are associated with multiple activity centers and cost drivers. This reflects a(n) __________ of activity-based accounting control systems.a. benefit b. limitation c. bureaucratic controld. organic control


97. __________ refer(s) to the use of devices and processes that are self-regulating and operate independently of people.a. Artificial intelligence b. Machine control c. Internet systemsd. Automation


98. __________ controls are methods that use instruments or devices to prevent and correct deviations from desired results.a. Financial b. Accounting c. Marketd. Machine


99. According to the text, research on the effects of introducing automated systems at one large factory indicated a(n) __________ in middle management jobs.a. reduction of 34 percentb. reduction of 7 percentc. increase of 2 percentd. none of the above


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100. HyCon Materials no longer needs full-time employees at its smaller factories. When machines malfunction, they send a signal to a central operations facility and a technician is sent out. This is known as a(n) __________. a. unattended operationb. lights-out system c. machine-control conceptd. remote access facility



Corporate Governance101. A __________ is a government-approved form of organization that allows different

parties to contribute capital, expertise, and labor.a. foundationb. charityc. trustd. corporation


102. The pattern of controls between stockholders and a company’s top management is __________.a. stakeholder relationsb. corporate governancec. binding arbitrationd. lateral communication


103. The rules of internal governance for a corporation are stated in its __________.a. corporate disclosureb. annual reportc. bylawsd. proxy statement


104. Carter Technologies needed to inform their shareholders about subjects to be voted on at their next shareholder meeting. They used a(n) __________.a. proxy statementb. notification of annual meetingc. annual reportd. form 10-K

ANSWER: A, Application, Difficult, p. 287

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105. External control mechanisms include all of the following except __________.a. proxy statementsb. corporate bylawsc. laws and regulatory agenciesd. possibility of being sued


106. The Sarbanes-Oxley Act was prompted by the occurrence of __________.a. insider tradingb. terrorist attacksc. corporate scandalsd. all of the above


107. Under the __________ mandates of the Sarbanes-Oxley Act, companies must report changes in financial condition as soon as they occur.a. corporate accountabilityb. certifiabilityc. auditabilityd. disclosure


108. Penalties for corporate officers who falsify corporate records can include __________.a. punitive damages of up to $100 millionb. imprisonment of up to 20 yearsc. both a and bd. individuals are not liable for corporate wrongs


109. All of the following are proposed as new requirements for sharpening the accountability of boards of directors except __________.a. direct experience as a former employeeb. oversight of executive compensationc. critical evaluation of CEOd. involvement in resource allocation

ANSWER: A, Knowledge, Moderate, pp. 288–289

110. Fiduciary responsibility of the board of directors refers to prevention of __________.a. financial mismanagementb. fraud and corruptionc. corporate crimed. all of the above

ANSWER: D, Knowledge, Easy, pp. 289–290

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111. The duties of Newell Rubbermaid’s Audit Committee are to __________.a. present financial findings to the SECb. explain financial reports to shareholdersc. oversee the work of the company’s auditorsd. all of the above


112. Members of Rubbermaid’s Audit Committee are not allowed to __________.a. fire independent auditorsb. stay if the Board wants them to leavec. intercede in disagreements between management and auditorsd. be involved in audit staffing decisions


Essay Questions


1. Define preventive and corrective controls. Give an example of each type.

a. Preventive controls—Mechanisms intended to reduce errors and thereby minimize the need for corrective action. Examples: Rules and regulations, standards, recruitment and selection, procedures, and training and development.

b. Corrective controls—Mechanisms intended to reduce or eliminate unwanted behaviors or results and thereby achieve conformity with the organization’s regulations and standards. Examples: Air traffic controller instructing pilot to change altitude and direction to avoid another plane. Revising a report you have written because you are dissatisfied with it.

Moderate, p. 267

2. What are three of the four primary sources of control? Give an example for each source.

a. Stakeholders. Examples: Unions, government agencies, customers, shareholders, others.

b. The organization itself. Examples: Rules, standards, budgets, audits.c. Groups. Examples: Punishments such as giving a group member the silent

treatment.d. Individuals. Examples: Standards of professionalism including acquiring detailed

knowledge, specialized competencies, and specific attitudes and ways of behaving.

Moderate, p. 269

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3. List and describe three of the five criteria upon which the effectiveness of organizational controls are evaluated.

a. Linkage to strategic goals. Control should be linked to the desired goals of the organization (e.g. improving customer service, protecting the organization’s assets, improving the quality of its goods and/or services).

b. Objective. Control is impartial and cannot be manipulated by employees for personal gain.

c. Complete. Control encompasses all the desired behaviors and goals.d. Timely. Control provides information when it is needed most.e. Acceptable. Control is recognized as necessary and appropriate.

Moderate, pp. 270–271


4. What are four of the six steps in the corrective control model? Explain each.

a. Define the system. A system can be an employee, a department, or an entire organization.

b. Identify the key characteristics to be measured. c. Set standards. Criteria for evaluating qualitative and quantitative characteristics for

each characteristic measured.d. Collect information. Can be collected manually or automatically.e. Make comparisons. Determine whether there is a difference between what is

happening and what should be happening.f. Diagnose problems and make corrections. Assess the types, amounts, and causes

of deviations from standards.

Difficult, pp. 272–276

5. Describe how Barclays Bank uses their communication competency to maintain high levels of customer satisfaction and to regain satisfaction when relations have been compromised.

Barclays Bank customers are actually encouraged to complain and comment. The bank’s policy is to acknowledge complaints within 24 hours and to furnish a full reply within five working days of an investigation completion. Included is an explanation of the causes and details of actions to be taken. In addition, the bank calls customers on the phone whenever possible.

A no-blame culture encourages staff to take initiatives to satisfy complaining customers and look for solutions without fear of being punished. Top management at Barclays considers complaints to be a contributor to operational improvement and long-term success of the organization. Information on complaints is published in staff newsletters for the purpose of making employees aware of problems and ways to solve them.

Moderate, p. 276

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6. List and describe three of the six primary types of organizational control.

a. Mechanistic and organic. (1) Mechanistic includes extensive rules and procedures, top-down authority,

tightly written job descriptions, and other formal methods for preventing and correcting deviations from desired behaviors and results.

(2) Organic includes flexible authority, relatively loose job descriptions, individual self-controls, and other informal methods for preventing and correcting deviations from desired behaviors and results.

b. Market. Involves the collection and evaluation of data related to sales, prices, costs, and profits to guide decisions and evaluate results.

c. Financial and accounting.(1) Financial. Includes mechanisms for preventing or correcting the misallocation

of resources. Comparative financial analysis and budgeting are given as examples in the text.

(2) Accounting. Text discusses activity-based costing systems that focus on activities as the fundamental cost centers.

d. Automation. Refers to the use of devices and processes that are self-regulating and operate independently of people.

Difficult, pp. 277–286

7. List and describe three of the six types of budgets discussed in the text.

a. Sales budget—A forecast of expected revenues, generally stated by product line.b. Materials budget—Expected purchases, generally stated by specific categories.c. Labor budget—Expected staffing, generally stated by number of individuals and

dollars for each job category.d. Capital budget—Targeted spending for major tangible assets.e. Research and development budget—Targeted spending for the refinement or

development of products, materials, and processes.f. Cash budget—Expected flow of monetary receipts and expenditures.


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8. Describe the key terms of corporate governance.

a. Annual meeting. Usually held at the end of a fiscal year in which shareholders and management discuss performance and goals. Directors are elected and shareholder concerns are addressed.

b. Annual report. An audited document that complies with Securities and Exchange Commission regulations.

c. Board of directors. A group elected individually by shareholders to oversee management of the corporation.

d. Bylaws. Rules of internal governance for the corporation as adopted by its board of directors.

e. Disclosure. Public dissemination of material, market-influencing information.f. Proxy statement. Document sent by the corporation to its shareholders informing

them about items that may be voted on at the shareholders meeting.


9. Discuss provisions of the Sarbanes-Oxley Act that offers external control mechanisms for corporate governance.

The Sarbanes-Oxley Act, passed into law in 2002, was prompted by corporate scandals. It furnishes safeguards relating to auditor independence, corporate responsibility, financial disclosures, conflicts of interest, and corporate accountability. Three broad categories are covered: certification, auditability, and disclosure.

Certification is the best known section that applies to top executives (CEO, CFO) in criminal liability for the falsification of financial statements. Fines of up to $5 million can be combined with imprisonment of up to 20 years for executives who are convicted. Auditability requires internal processes to be set up to ensure that appropriate controls are in place. The disclosure mandates require companies to promptly report financial information that makes significant changes in their financial condition.


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