Question

Exercise 1-6.

Performance Reports [LO 1]

Which of the following statements related to performance reports is false?

a. Performance reports may provide a comparison of actual performance with planned performance.

b. Performance reports may provide a comparison of actual performance with performance in a prior period.

c. If actual costs exceed planned costs in a performance report, this clearly indicates managerial incompetence.

d. Performance reports are used to evaluate managers and the operations they control

Answer 1

Answer is c

If actual costs exceed planned costs it does not mean management is incompetent. The reasons for variance should be analysed. Sometimes the actual cost maybe higher due to reasons beyond management control. Hence in these cases it is uncontrollable variance. For example, shortage of raw material in market due to change in government policy may increase purchase price which is not in hands of management.

Performance reports include comparison with prior period and planned performance. Performance reports are used to evaluate managers for incentive purpose. Hence answer c is false.