Accounting Ch 11
1) Manager may take actions that increase ROI in the short run but harm the company In the long run (e.g., cut R&D expenses). 2) Managers evaluated on ROI may reject profitable investment opportunities that are profitable for the whole company but would have a negative impact on the manager's performance evaluation (show in the next section).
2 Criticisms of ROI
B
A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the Manufacturing Cycle Efficiency (MCE)? A) 50.0%. B) 1.9%. C) 52.0%. D) 5.1%.
C
A TQM team at Narton Corp has recorded the following average times for production: Wait 3.0 days Move 0.5 days Inspection 0.4 days Queue 9.3 days Process 0.2 days What is the delivery cycle time (DCT)? A) 0.5 days. B) 0.7 days. C) 13.4 days. D) 10.4 days.
A
A reason that a firm might choose to maintain centralized decision-making instead of decentralizing would be: A) lower level mangers may have objectives that conflict with the objectives of the entire organization. B) the increased cost necessary to support expert knowledge in a centralized environment. C) the training that is provided to lower management by decentralized operations. D) the superior customer relations which typically result from centralized operations.
no
Are most firms are neither totally centralized nor totally decentralized
1) Lower-level decisions often based on better information. 2) Lower-level managers gain experience in decision-making. 3) Top management freed to concentrate on strategy. 4) Lower level managers can respond quickly to customers. 5) Decision-making authority leads to job satisfaction.
Benefits of Decentralization (5)
1) Lower-level managers may make decisions without seeing the "big picture." 2) May be a lack of coordination among autonomous managers. 3) Lower-level manager's objectives may not be those of the organization. 4) May be difficult to spread innovative ideas in the organization.
Disadvantages of Decentralization
an asset's net book value decrease over time, leading to ROI mechanically increase over time. Replacing old equipment increases the book value and decreases ROI. An alternative is to use gross cost of the asset, which ignores accumulated depreciation.
Drawback of using netbook value
1) They are "backward looking" and short-term focused (lag indicators) 2) They include only quantitative measures and no qualitative measures
General criticism over RI & ROI (2)
acquisition cost - accumulated depreciation
How to calculate netbook value
Value-added time/Manufacturing Cycle Time
Manufacturing Cycle Efficiency formula
net operating income/sales
Margin formula
net book
Most companies use the ___ ___ value of depreciable assets to calculate average operating assets. This is consistent with their financial reporting practice.
Process Time + Inspection Time + Move Time + Queue Time
Name all 4 Manufacturing Cycle/Throughput times
B
Redmond Awnings, a division of Wrap-up Corp., has a net operating income of $60,000 and average operating assets of $300,000. If the manager of the division is evaluated based on ROI, will she want to make an investment of $100,000 that would generate additional net operating income of $18,000 per year? A) yes B) no
A
Redmond Awnings, a division of Wrap-up Corp., has a net operating income of $60,000 and average operating assets of $300,000. The required rate of return for the company is 15%. If the manager of the Redmond Awnings division is evaluated based on residual income, will she want to make an investment of $100,000 that would generate additional net operating income of $18,000 per year?
D
Redmond Awnings, a division of Wrap-up Corp., has a net operating income of $60,000 and average operating assets of $300,000. The required rate of return for the company is 15%. What is the division's ROI? A) 25% B) 5% C) 5% D) 20%
C
Redmond Awnings, a division of Wrap-up Corp., has a net operating income of $60,000 and average operating assets of $300,000. The required rate of return for the company is 15%. What is the division's residual income? A) $240,000 B) $ 45,000 C) $ 15,000 D) $ 51,000
Net income - (avg operating assets x minimum required rate of return)
Residual Income formula
A
Residual income = $5,000 Minimum required return: $15,730 Average operating assets = $143,000 Sales = $670,000 Find Return on Investment (ROI). A) 14% B) 16% C) 17% D) 19%
1) net income/avg operating income 2) turnover*margin
Return on Investment (ROI) Formulas
process time
The only value added time is
Wait Time
Time between order being received and production being started
Process Time, Inspection Time, Move Time, Queue Time
Time between production starting and goods being shipped (4)
sales/avg operating assets
Turnover formula
degree
Typically, decentralization is a matter of ____
Exclude: land held for future use, investment in another company, building rented for someone else.
What is excluded from average operating assets
Cash, accounts receivable, inventory, plant and equipment, and other productive assets.
What is included in average operating assets
Througput
What is the time between production starting and goods being shipped called
It cannot be used to compare the performance of divisions of different sizes.
major disadvantage of the residual income approach
decentralized
organization that grants substantial decision making authority to the managers of subunits
Return on Investment (ROI), Residual Income (RI)
what are the two performance measures
