Chapter 11 Accounting

Average Operating Assets

(Beginning assets + Ending assets) / 2

Investment Center

A decentralized division of a corporation which is responsible for and has control over its costs, revenues, and investments.

Profit Center

A division or department of a business whose managers are responsible for both revenues and expenses.

ROI formula

A financial ratio that expresses the income statement effect from employing an asset as a percentage of the asset's cost on the balance sheet. ROI= net operating income/average operating assets Margin*Turnover

Turnover

Annualized formula that tracks number of separations and total number of workforce employees for each month. Sales/Average Operating Assets

If Traceable Fixed Costs Change, what's the effect?

For instance, if a business did not have a research-and-development division, the business would not have a research-and-development division manager to whom it had to pay a salary. If the research-and-development division never existed, the cost of the division manager's salary would have never existed. Furthermore, if the research-and-development division ceased to exist, the cost of the division manager's salary would no longer exist. Therefore the cost of the manager's salary is specifically traceable to the research-and-development division.

Turnover goes up if

If you reduce your operating assets, turnover goes up If turnover goes up ROI goes up

Residual Income

Multiplie Minimum Rate of Return * AOA give= Minimum require return Subtract from Actual Return

Margin goes up if

NOI goes up/Rev goes up/Expenses go down If margin goes up ROI goes down

Residual Income formula

Residual income is the amount of income that an individual has after all personal debts, including the mortgage, have been paid. NOI-(average operating assets x minimum required of return) Residual Income (RI) = A − (B × C) In the above formula, A = Department's net operating income; B = Minimum required return on assets; and C = Average operating assets of the department

Margin formula

The increase in total cost that arises from an extra unit of production, the increase or decrease in costs as a result of one more or one less unit of output NOI / Sales

Net Operating Income

When you deduct the annual operating expenses of the real estate from the effective gross income. income before interest and income taxes have been deducted

Difference between Profit Center and Cost Center

A cost center is a subunit of a company that is responsible only for its costs. Example of cost centers are the production departments and the service departments within a factory and administrative departments such as IT and accounting. A profit center is a subunit of a company that is responsible for revenues and costs. Often a division of a company is a profit center because it has control over its revenues, costs, and the resulting profits.

Cost Center

A cost center is often a department within a company. The manager and employees of a cost center are responsible for its costs but are not responsible for revenues or investment decisions.

Operating Assets

Cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes

Common Cost

Costs that are common to several products, processes, activities, departments, territories, etc. Often common costs are subsequently allocated to each of the joint products, joint processes, etc. in order to determine the cost of each.

Residual Income Disadvantages

cannot be used to compare the performance of divisions of different sizes

Residual Income Advantages

encourages managers to make investments that are profitable for the entire company but would be rejected by managers who are evaluated using the ROI formula You won't reject profitable opportunity.