PERFORMANCE EVALUATION, VARIABLE COSTING,
In centralized decision making, decisions are
made at the very top level, and lower-level
managers are responsible for implementing
these decisions. For decentralized decision
making, decisions are made and implemented
by lower-level managers.
Decentralization is the delegation of decision-
making authority to lower levels.
Reasons for decentralization include access
to local information, cognitive limitations, more
timely responses, focusing of central manage-
ment, training, and motivation.
Margin = Operating income/Sales and
Turnover = Sales/Average operating assets.
By breaking ROI into margin and turnover,
more information is available to assess per-
formance. Knowledge of margin and turnover
gives more insight into why the ROI may
change from one period to the next.
ROI (1) encourages managers to pay atten-
tion to the relationships among sales, ex-
penses, and investment; (2) encourages cost
efficiency; and (3) discourages excessive in-
vestment in operating assets. Increased profit-
ability can be achieved (all else being equal)
by increasing revenues, decreasing ex-
penses, or lowering investment.
Residual income is equal to operating income
minus the minimum cost of capital multiplied
by the average operating assets. EVA (eco-
nomic value added) requires the company to
calculate its actual cost of capital and use it as
the minimum cost of capital in the residual in-
come calculation. In addition, EVA always
uses after-tax income.
Yes, residual income and EVA can be negat-
ive. This means that the company earned less
than its minimum cost of capital or, in the case
of EVA, its actual cost of capital.
A transfer price is the price charged for goods
that are transferred from one division to an-
The only difference is the way in which fixed
overhead costs are assigned. Under variable
costing, fixed overhead is a period cost; under
absorption costing, it is a product cost.
Absorption-costing income is greater because
some of the period’s fixed overhead is placed
in inventory and not recognized on the
absorption-costing income statement.
A segment is any subunit of sufficient import-
ance to warrant production of performance re-
Contribution margin is the amount available to
cover fixed expenses and provide for profit.
Segment margin is the amount available to
cover common fixed expenses and provide for
profit. Contribution margin is the difference
between revenues and variable expenses.
Segment margin is contribution margin less
direct fixed expenses.
The Balanced Scorecard is a strategic man-
agement system that defines a strategic-
based responsibility accounting system. It
translates an organization’s mission and
strategy into operational objectives and per-
formance measures for four different per-
spectives: the financial perspective, the cus-
tomer perspective, the internal business pro-