MOwen Chapter 12--revised

MOwen Chapter 12--revised - Chapter Twelve Performance...

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Unformatted text preview: Chapter Twelve Performance Evaluation and Decentralization Learning Objectives 1. Explain how and why firms choose to decentralize. 2. Compute and explain return on investment. 3. Compute and explain residual income and economic value added. 4. Explain the role of transfer pricing in a decentralized firm. 5. (Appendix) Explain the uses of the Balanced Scorecard, and compute cycle time, velocity, and manufacturing cycle efficiency. 22 OBJECTIVE h 1 Explain how and why firms choose to decentralize. Decentralization Delegating decision-making authority Why firms decentralize: Ease of gathering and using local information Focusing on central management from detailed operations to strategic planning Training and motivating of segment managers to prepare new high-level managers Enhanced competition, exposing segments to market forces, which allow each unit to act as an autonomous business unit Achieved by creating Divisions 44 Divisions Differentiated by: Type of product or service provided Geographic lines Type of responsibility given to divisional manager Responsibility Center is a segment of business whose manager is accountable for specified sets of activities 55 Types of Responsibility Centers Cost center Manager is responsible only for costs Revenue center Manager is responsible only for sales Profit center Manager is responsible for both revenues and costs Investment center Manager is responsible for revenues, costs, and investments 66 Measuring the Performance of Profit Centers Preparation of segmented income statements Two method of computing income: Variable costing Full or Absorption costing Methods often lead to different operating income figures 77 OBJECTIVE h 2 Compute and explain return on investment. Return on Investment (ROI) 99 Operating Income Average Operating Assets Earnings before income and taxes (EBIT) Formula: Return on Investment (ROI) 1010 Operating Income Average Operating Assets (Beginning assets + Ending assets) 2 Formula: Return on Investment (ROI) 1111 Margin x Turnover Operating Income Sales Alternative Formula: Return on Investment (ROI) 1212 Margin x Turnover Sales Average Operating Assets Alternative Formula: Margin and Turnover Margin Ratio of operating income to sales Tells how many cents of operating income result from each dollar of sales Expresses the portion of sales that is available for interest, taxes, and profit Turnover Divides sales by average operating assets Tells how many dollars of sales result from every dollar invested in operating assets 1313 Advantages of ROI Encourages managers to focus on Relationship among: Sales Expenses Investment Cost efficiency Operating asset efficiency 1414 Disadvantages of ROI Can produce a narrow focus on divisional profitability at the expense of profitability for the overall firm Encourages managers to focus on the short run at the expense of the long run 1515 HOW TO Calculate Average Operating Assets, Margin, Turnover, and Return on Investment 1616 Example...
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This note was uploaded on 05/04/2011 for the course ACCOUNTING 2102 taught by Professor Wurst during the Spring '11 term at Temple.

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MOwen Chapter 12--revised - Chapter Twelve Performance...

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