CHAPTER 23PERFORMANCE MEASUREMENT, COMPENSATION, ANDMULTINATIONAL CONSIDERATIONS23-1Examples 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 ofnew patents filed.Learning-and-growth perspective: employee satisfaction, information-system availability.23-2The six steps in designing an accounting-based performance measure are:1.Choose performance measures that align with top management’s financial goals2.Choose the time horizon of each performance measure in Step 13.Choose a definition of the components in each performance measure in Step 14.Choose a measurement alternative for each performance measure in Step 15.Choose a target level of performance6.Choose the timing of feedback23-3The DuPont method highlights that ROI is increased by any action that increases returnon sales or investment turnover. ROI increases with:1.increases in revenues,2.decreases in costs, or3.decreases in investments,while holding the other two factors constant.23-4Yes. Residual income (RI) is not identical to return on investment (ROI). ROI is apercentage with investment as the denominator of the computation. RI is an absolute monetaryamount which includes an imputed interest charge based on investment.23-5Economic value added (EVA) is a specific type of residual income measure that iscalculated as follows:Economic valueadded (EVA)=After-taxoperating income–(29Total assets minusWeighted-averagecost of capitalcurrent liabilities×23-6Definitions of investment used in practice when computing ROI are:1.Total assets available2.Total assets employed3.Total assets employed minus current liabilities4.Stockholders’ equity23-1
23-7Current cost is the cost of purchasing an asset today identical to the one currently held ifan identical asset can currently be purchased; it is the cost of purchasing an asset that providesservices like the one currently held if an identical asset cannot be purchased. Historical-cost-based measures of ROI compute the asset base as the original purchase cost of an asset minusany accumulated depreciation.Some commentators argue that current cost is oriented to current prices, while historicalcost is past-oriented.