CH10 Responsibility Accounting

CH10 Responsibility Accounting - ROI = Margin Turnover =(OI...

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CH10 Decentralization: Responsibility Accounting, Performance Evaluation, and Transfer Pricing 1
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Agenda Elements of responsibility accounting Performance measures for investment centers Transfer pricing 2
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Responsibility Accounting Set up responsibility centers Identify performance measures Measure performance Reward/penalize performance 3
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Responsibility Centers Responsibility Center Performance Measure (examples) Cost Center Actual cost; Cost change Revenue Center Actual sales revenue; Revenue growth Profit Center Profit from a variable costing I/S or a Segmented I/S Investment Center ROI; Residual income; EVA
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Performance Measures for Investment Centers Return on Investment (ROI) Residual Income (RI) Economic Value Added (EVA) 5
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Return on Investment Measure profit per dollar of investment ROI = OI / Avg. Oper. Assets (Beg. Balance + End. Balance) / 2 DuPont decomposition
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Unformatted text preview: ROI = Margin * Turnover = (OI / Sales) * (Sales / Avg. Oper. Assets) • Disadvantages 6 Residual Income • RI is a dollar amount • RI = OI – Avg. Oper. Assets * min. rate of return • RI > 0, accept the project 7 Economic Value Added • EVA = Net Income – total cost of capital WACC * Total capital employed • Weighted Average Cost of Capital (WACC) • EVA > 0, create wealth • EVA < 0, destroy wealth 8 Transfer Price • A concern when internal transfers occur • Why? – Income tax – Performance evaluation • Minimum vs. Maximum transfer price 9 Transfer Pricing Policy • Market price • Negotiated price Avoidable expense Excess capacity • Cost-based price Full cost Full cost + markup Variable cost + fixed fee Resale price = resale price – retailer's avg. profit 10...
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