cost12ism_23 - CHAPTER 23 PERFORMANCE MEASUREMENT COMPENSATION AND MULTINATIONAL CONSIDERATIONS 23-1 Examples of financial and nonfinancial measures of

cost12ism_23 - CHAPTER 23 PERFORMANCE MEASUREMENT...

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CHAPTER 23 PERFORMANCE MEASUREMENT, COMPENSATION, AND MULTINATIONAL CONSIDERATIONS 23-1 Examples of financial and nonfinancial measures of performance are: Financial: ROI, residual income, economic value added, and return on sales. Nonfinancial: Customer perspective: Market share, customer satisfaction. Internal-business-processes perspective: Manufacturing lead time, yield, on-time performance, number of new product launches, and number of new patents filed. Learning-and-growth perspective: employee satisfaction, information- system availability. 23-2 The six steps in designing an accounting-based performance measure are: 1. Choose performance measures that align with top management’s financial goals 2. Choose the time horizon of each performance measure in Step 1 3. Choose a definition of the components in each performance measure in Step 1 4. Choose a measurement alternative for each performance measure in Step 1 5. Choose a target level of performance 6. Choose the timing of feedback 23-3 The DuPont method highlights that ROI is increased by any action that increases return on sales or investment turnover. ROI increases with: 1. increases in revenues, 2. decreases in costs, or 3. decreases in investments, while holding the other two factors constant. 23-4 Yes. Residual income (RI) is not identical to return on investment (ROI). ROI is a percentage with investment as the denominator of the computation. RI is an absolute monetary amount which includes an imputed interest charge based on investment. 23-5 Economic value added (EVA) is a specific type of residual income measure that is calculated as follows: Economic value added (EVA) = After-tax operating income ( 29 Total assets minus Weighted-average cost of capital current liabilities × 23-6 Definitions of investment used in practice when computing ROI are: 1. Total assets available 2. Total assets employed 3. Total assets employed minus current liabilities 4. Stockholders’ equity 23-1

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