Question

In evaluating the performance of a manager of a foreign subsidiary, what issues are associated with the calculation of profit?

1. All answers are correct.
2. Whether to adjust profit for items included in profit over which the manager has no control.
3. Whether to measure profit in local currency or in parent company currency.
4. If profit is measured in parent company currency, the method of foreign currency translation to be used.

How can a local currency operating budget and actual results be translated into parent currency without holding the foreign manager responsible for foreign exchange risk?

1. Translating the budget and actual results using the same exchange rate will exclude an exchange rate component from the budget total variance.
2. Using the historical exchange rate for the budget and current exchange rate for the budget will exclude an exchange rate component from the budget total variance.
3. Using the current exchange rate for the budget and historical exchange rate for the budget will exclude an exchange rate component from the budget total variance.
4. It’s never appropriate to hold the foreign manager responsible for foreign exchange risk.

When actual results are compared to an operating budget, under what conditions might it be appropriate to hold the manager of a foreign subsidiary responsible for an exchange rate variance as part of the total budget variance?

1. When they have the authority to hedge against the adverse effect that an exchange rate has on their operating results.
2. It is always appropriate.
3. It is never appropriate.
4. When the exchange rate has fluctuated more than 20% from the end of the previous year.

Answer 1

Solution 1 : Answer is A (All answers are correct.)

Explanation : In evaluating the manager of the foreign subsidiary on the basis of profit, the following issue should be considered :

1. Whether to adjust profit for items included in profit over which the manager has no control.
2. Whether to measure profit in local currency or in parent company currency.
3. If profit is measured in parent company currency, the method of foreign currency translation to be used.           
4. If profit is measured in parent company currency, whether the translation adjustment is included in the measure of profit used for evaluation process.

Solution 2 : Answer is A (Translating the budget and actual results using the same exchange rate will exclude an exchange rate component from the budget total variance)

Explanation : Translating the budget and actual results using the same exchange rate, e.g., the actual exchange rate at the time the budget is prepared, will exclude an exchange rate component from the total budget variance. As a result, the foreign manager is not held responsible for foreign exchange rate.

Solution 3 : Answer is A (When they have the authority to hedge against the adverse effect that an exchange rate has on their operating results)

Explanation : It can be appropriate to hold managers of foreign subsidiaries responsible for an exchange rate variance when they have the authority to hedge against the adverse effect that the exchange rate change has on their operating results.