acct chapter 10

ROI

. Shows the effectiveness of the manager utilizing the assets at his disposal

responsibility accounting

Area of accounting in which managers are given authority over and responsibility for a particular area of the organization and are then evaluated based on the results of that area of responsibility. (417)

responsibility center

Area over which managers are given responsibility for specific operations of an organization.

investment

As such, the metrics used to evaluate ____center managers must take into account both profitability and the amount of investment used to generate that profitability.

controllability princciple

Concept that managers should be held responsible for only those things that they can control.

(minimum rate of return x invested assets)

Net operating income formula

sales revenue - operating expenses = net operating income

Net operating income formula

economic value added

Objective - to determine whether the company is generating sufficient after -tax income to cover the cost of capital.

centralized organization

Organization in which decision-making authority is spread throughout, and managers are responsible for deciding how to manage their particular area of responsibility.

decentralized organization

Organization in which decision-making authority is spread throughout, and managers are responsible for deciding how to manage their particular area of responsibility.

Net operating income / average invested assets or Profit margin x investment turnover

ROI Formula

period

Reasearch and development are period cost and dispensed in the ___ they occur

cost center

Responsibility center in which the manager has authority over and responsibility for cost.

revenue center

Responsibility center in which the manager has authority over and responsibility for generating revenue.

investment center

Responsibility center in which the manager has authority over and responsibility for profit (revenue minus cost) and the investment of assets.

profit center

Responsibility center in which the manager has authority over and responsibility for profit (revenue minus cost).

noi /asi

Return on investments (roi) =

profit margin

The ___ __ shows how much of a segment's sales revenue remains as operating income after operating costs have been deducted.

market based negotiated transfer price cost based transfer price

Three types of transfer prices

market price (cieling and variable cost (floor)

Transfer price will between the ___ ___ and the ____ ___

variable

Variable costs are ____ considerd controllable

revenue center

___ managers are evaluated primarily based on their ability to meet revenue or sales goals.

cost centers

advertising, human resources, purchasing, supply chain management, information technology, legal services, and accounting. are examples of what center

investment center

authority to make decisions about how and where to invest the company's assets.

beginning total asets = ending total assets/ 2

average invested assets =

Financial perspective Customer perspective Internal business processes perspective Learning and growth perspective

basic idea of the balanced scorecard is that organizations must excel along the following dimensions to achieve the company's strategic vision:

cost center

center incurs costs (and expenses) but does not directly generate revenues. Usually some type of production or service department.

revenue center

center incurs costs (and expenses) but does not directly generate revenues. Usually some type of production or service department.

profit centers

center incurs costs and also generates revenues.

Profit center

center that is responsible for both cost and revenue

balanced score card

comprehensive performance measurement system that translates an organization's strategic vision into a set of operational performance metrics.

Non-controllable costs (indirect) (common fixed costs)

costs incurred indirectly and allocated to a responsibility level.

internal business process measures

deminsion on the balanced score card that can be measured through percentage of new products launched, manfufacturing cycle time, inventory stockouts, number of defects

customer measured

deminsion on the balanced score card that can be measured through percentage of sales from new products, customer satisfaction, percentage of repeat customers, market share

financial

deminsion on the balanced score card that can be measured through sales growth, profitibabilit, return on investment, residual income, economic value added

profit margin return on investment

financial performance measures

Variable Costs

for transfers are defined as ____ costs of units sold internally - usually does not include selling, marketing, administrative overhead or research and development costs.

net operating income

formula that ignores the fact that one division might use substantially fewer assets to attain the same level of residual income as another division.

return on investment

formula that shows the effectiveness of the manager utilizing the assets at his disposal.

Price to wholesalers - manufacturing cost Per unit!!!

gross profit per unit =

increase sales decrease variable or fixed expenses

improve ROI by 2 things

Sales revenue SR/ average investments

investment turn over (IT) =

sales revenue / average invested assets

investment turn over formula

residual income

is the amount of net operating income earned over and above the minimum amount needed to meet the required rate of return.

profit margin

is the ratio of net operating income to sales revenue

economic value added

measures the economic wealth that is created when a company's after-tax net operating income exceeds it cost of capital.

residual income

net operating income can be used to measure

customer objective

objective on the balanced score card is to delight customers by providing them with new products and services with innovative design, superior ease of use, and exception post sales support

internal business processes objective

objective on the balanced score card is to design, manufacture and deliver new products to market that excceed customer expecations in terms of quality, performance and design

financial

objective on the balanced score card is to generate superior returns for shareholders

segmented

profit center manager is based on the ____income statement, or an income statement that is broken down by product line, region, or other business segments

direct vs common fixed costs

profit center managers are ratedo on the segment margin which breacaks down ___ VS ____

Net operating income (noi)/ Sales revenue (SR

profit margin =

net operating income/ sales revenue

profit margin formual

net operating income / sales revenue

profit margin formula

transfer price

related party transactions

the income that remains after subtracting the minimum rate of return from the controllable margin on a company's average operating assets

residual income

net income - minimum acceptable profit or noi - (average invested assets x hurdle rate) or ROI % - hurdle rate % = Residual return % x average invested assets = residual income

residual income 3 formulas

Net Operating Income (-) (Minimum Rate of Return x Invested Assets) (=) Residual Income (can be a negative number)

the income that remains after subtracting from the controllable margin the minimum rate of return on a company's average operating assets.

economic value added

this measurement uses Cost of capital as the hurdle rate.

economic value added

this measurement uses Total capital employed rather than average invested assets.

economic value added

this measurement uses after tax net operating income (net income)

market price - manufacturing cost

total gross profit per unit =

market based

transfer Based on existing market prices of competing goods and services. (ceiling)

market based transfer

transfer Not always a well-defined market for the good or service being transferred.

Cost based transfer price

transfer based on Variable costs alone or Variable Costs plus Fixed Costs plus a markup amount. (floor)

negotiated transfer price

transfer determined through agreement of division managers.

Cost based transfer

transfer that may leads to loss of profitability for the company and unfair evaluations