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Question: Biases like motivated reasoning and surrogation are


Biases like motivated reasoning and surrogation are very prevalent in the business world. Managers are often compensated and evaluated based on performance measures such as production costs and profit margin. Hence, when subjective decisions need to be made regarding joint cost allocation, support department cost allocation, and budgeting, managers are motivated to believe and overvalue evidence that supports their products receiving less cost allocations, more budgeting, and other favorable outcomes. At the same time, managers will discount any evidence or reasoning that does not produce a favorable outcome for them. This is all part of the bias known as motivated reasoning. It is important to note, as well, that people exhibit the motivated reasoning bias unconsciously. In other words, people commonly overvalue favorable information and discount unfavorable information without realizing it.
Surrogation is another bias that managers frequently unintentionally exhibit. A brief example of
this bias is illustrated in the following story:
The management of a restaurant chain seeking to improve customer satisfaction uses online customer reviews as a measure of this strategic objective. To encourage this objective, management offered a generous bonus to all employees at restaurant locations that increase their online customer review rating by one star. After a few months, management noticed the online customer review rating had dramatically increased at one particular location and paid out the increased bonus. Upon further investigation, management discovered that the manager of this location was offering 15% discounts on all purchases to anyone who gave the restaurant a 5-star review.
This story illustrates surrogation bias because, at that particular location, the performance measure was being treated like the strategic objective. While the performance rating improved, it was not reflective of the strategic objective it was meant to measure (customer satisfaction).
a. How can the cognitive biases of motivated reasoning and surrogation affect the usefulness of the balanced scorecard?
b. Develop some ideas of how you can protect yourself from falling prey to each of these biases.



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> What is the purpose of scorecard cascading?

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> Hannon Retailing Company prices its products by adding 30% to its cost. Hannon anticipates sales of $715,000 in July, $728,000 in August, and $624,000 in September. Hannon’s policy is to have on hand enough inventory at the end of the month to cover 25%

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> Bethany Company has just completed the first month of producing a new product but has not yet shipped any of this product. The product incurred variable manufacturing costs of $5,000,000, fixed manufacturing costs of $2,000,000, variable marketing costs

> Mill Corporation had the following unit costs for the recent calendar year: Inventory for Mill’s sole product totaled 6,000 units on January 1 and 5,200 units on December 31. When compared to variable costing income, Millâ€&

> Chassen Company, a cracker and cookie manufacturer, has the following unit costs for the month of June: Variable manufacturing cost ………………. $5.00 Variable marketing cost ………………………. 3.50 Fixed manufacturing cost …………………… 2.00 Fixed marketing cost ……………………

> Data for the last fiscal year for Merlene Company are as follows: *Denominator level of activity is 750 units for the year Actual selling and administrative costs equaled the budgeted amount, and there were no work in process inventories at the end of t

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> Kimber Company has the following unit costs for the current year: Raw materials ……………………….…………….. $20.00 Direct labor …………………….…………………….. 25.00 Variable manufacturing overhead …………... 10.00 Fixed manufacturing overhead …….……….… 15.00 Total unit cost …………

> Taylor Corporation is analyzing the cost behavior of three cost items, A, B, and C, to budget for the upcoming year. Past trends have indicated the following dollars were spent at three different levels of output: In establishing a budget for 14,000 uni

> How are strategic objectives and strategic initiatives different? How are they related?

> Tucariz Company processes Duo into two joint products, Big and Mini. Duo is purchased in 1,000-gallon drums for $2,000. Processing costs are $3,000 to process the 1,000 gallons of Duo into 800 gallons of Big and 200 gallons of Mini. The selling price is

> Breegle Company produces three products (B-40, J-60, and H-102) from a single process. Breegle uses the physical volume method to allocate joint costs of $22,500 per batch to the products. Based on the following information, which product(s) should Breeg

> Adam Corporation manufactures computer tables and has the following budgeted indirect manufacturing cost information for the next year: If Adam uses the step-down (sequential) method, beginning with the Maintenance Department, to allocate support depart

> Logo Inc. has two data services departments (Systems and Facilities) that provide support to the company’s three production departments (Machining, Assembly, and Finishing). The overhead costs of the Systems Department are allocated to

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> Young Company is beginning operations and is considering three alternatives to allocate manufacturing overhead to individual units produced. Young can use a plantwide rate, departmental rates, or activity-based costing. Young will produce many types of p

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> Pelder Products Company manufactures two types of engineering diagnostic equipment used in construction. The two products are based upon different technologies, X-ray and ultrasound, but are manufactured in the same factory. Pelder has computed the manuf

> A company is using process costing with the first-in, first-out (FIFO) method, and all costs are added evenly throughout the manufacturing process. If there are 5,000 units in beginning work in process inventory (30% complete), 10,000 units in ending wor

> Kimbeth Manufacturing uses a process cost system to manufacture dust density sensors for the mining industry. The following information pertains to operations for the month of May: The beginning inventory was 60% complete for materials and 20% complete

> What is the purpose of the performance perspectives of a balanced scorecard?

> Jones Corporation uses a first-in, first-out (FIFO) process cost system. Jones has the following unit information for the month of August: The equivalent units of production for conversion costs for the month of August were: a. 87,300 units. b. 88,000 u

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> John Sheng, a cost accountant at Starlet Company, is developing departmental factory overhead application rates for the company’s Tooling and Fabricating departments. The budgeted overhead for each department and the data for one job ar

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> What is the difference between a leading indicator and a lagging indicator?

> Blake & McKenzie Tax Services is a company serving 72 clients (as of the beginning of last month) that is working on reorganizing its balanced scorecard. Currently, the company has the following performance metrics: online client satisfaction rating, cli

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> Financial information for Apple Inc. (AAPL), The Coca-Cola Company (KO), and Verizon Communications (VZ) follows (in millions): a. Compute the free cash flow for each company. b. Compute the ratio of free cash flow to sales for each company. Round to on

> Amazon.com, Inc. (AMZN) is one of the largest Internet retailers in the world. Best Buy Co., Inc. (BBY) is a leading retailer of consumer electronics and media products in the United States, while Wal-Mart Stores, Inc. (WMT) is the leading retailer in th

> Green Manufacturing is a traditional manufacturing company located in the midwestern United States. The company’s operations manager is developing a strategy to become more CSR-oriented. In an effort to evaluate possible areas where CSR

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> How does a strategic performance measurement system improve upon an ordinary performance measurement system?

> Den-Tex Company is evaluating a proposal to replace its HID (high intensity discharge) lighting with LED (light emitting diode) lighting throughout its warehouse. LED lighting consumes less power and lasts longer than HID lighting for similar performance

> Northern Highlands Hospital is evaluating its admissions process by measuring the time elapsed between patient check-in and arrival in the clinical area. The present process involves a patient checking in at a centralized area and providing information t

> Assume Home Garden Inc. in MAD 12-5 assigns the following probabilities to the estimated construction cost of the warehouse and annual net cash flows: a. Compute the expected value of the construction cost. b. Compute the expected value of the annual ne

> Home Garden Inc. is considering the construction of a distribution warehouse in West Virginia to service its east coast stores based on the following estimates: Construction cost of warehouse ……. $20,000,000 to $25,000,000 Residual value …………………………………………

> Assume Boulder Creek Industries in MAD 12-3 assigns the following probabilities to the estimated annual net cash flows: a. Compute the expected value of the annual net cash flows. b. Determine the expected net present value of the equipment, assuming a

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> Assume San Lucas Corporation in MAD 12-1 assigns the following probabilities to the estimated annual net cash flows: a. Compute the expected value of the annual net cash flows. b. Determine the expected net present value of the equipment, assuming a des

> San Lucas Corporation is considering investment in robotic machinery based upon the following estimates: Cost of robotic machinery ……….. $4,000,000 Residual value …………………………….. 300,000 Useful life ……………………………………. 10 years a. Determine the net present val

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> McDonald’s Corporation (MCD) operates company-owned and franchised restaurants in over 100 countries. The company operates primarily as a franchisor with approximately 85% of its current restaurants operated by franchisees. McDonald&aci

> A chemical company has a commodity-grade and premium-grade product. Why might the company elect to process the commodity-grade product further to the premium-grade product?

> Compare Panera Bread (PNRA) and Papa John’s (PZZA) using your computations from MAD 10-2 and MAD 10-3. MAD 10-2: United States and Canada and serves over 9 million customers per week. Panera’s operations are divided i

> Papa John’s International, Inc. (PZZA), operates over 5,000 restaurants in the United States and 45 countries. The company operates primarily as a franchisor with 4,353 franchised restaurants and 744 company-operated restaurants. Recent

> United States and Canada and serves over 9 million customers per week. Panera’s operations are divided into the following segments: â–ª Company-Operated Bakery-Cafes â–ª Franchised Bakery-Cafes â&#1

> Kelly Kitchens operates both franchised and company-operated restaurants under the brand name Kelly Kitchens. Operating income, sales, and invested assets for both segments are provided as follows: a. Determine the profit margin for company-operated and

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> Comcast Corporation (CMCSA) is a global media and entertainment company with operations divided into five major segments: â–ª Cable Communications (XFINITY) â–ª Cable Networks (USA Network, Syfy, E!, CNBC, others) â&

> (a) Explain how return on investment might lead a divisional manager to reject new investments that could be profitable for the company as a whole. (b) How can this disadvantage be overcome?

> How do the multiple production department and the single plantwide factory overhead rate methods differ?

> Global Air is considering a new flight between Atlanta and Los Angeles. The average fare per seat for the flight is $760. The costs associated with the flight are as follows: The airline estimates that the flight will sell 175 seats. a. Determine the br

> William’s Ball & Jersey Shop is a small athletic products company currently trying to determine cost allocations. Accurate costing numbers are important but not crucial; no employee bonuses depend on them, and the company wants to k

> Joyous Julius, Inc., is a large retail chain that has grown quickly thanks to its successful leveraging of homemade-style orange julius. The company would like to narrow down the number of flavors it offers to three. Joyous Julius, Inc., currently produc

> Horsepower Hookup, Inc., is a large automobile company that specializes in the production of high-powered trucks. The company is determining cost allocations for purposes of performance evaluation. A portion of company bonuses depends on divisions achiev

> Milkrageous, Inc., a large, private dairy products company, is determining cost allocations for performance evaluation purposes. Company bonuses are based on cost containment, so accurate costing numbers are imperative. The general managers (GMs) over th

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> Dura-Conduit Corporation manufactures plastic conduit that is used in the cable industry. A conduit is a tube that encircles and protects the underground cable. In the process for making the plastic conduit, called extrusion, the melted plastic (resin) i

> Antolini Enterprises produces men’s sports coats that are sold by popular department stores. Each retail order is treated as a job that accumulates materials, labor, and overhead costs for a batch of sports coats. Management has obtaine

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