ACC 241: Ch 10 Performance Evaluation

Return on investments (ROI)

A measure of profitability and efficiency computed as operating income divided by total assets.

Economic value added

A residual income measure calculating the amount of income generated by the company or its divisions in excess of stockholders' and long-term creditors' expectations

application base of decentralized option

Business characteristic - geographic area, product line, customer base, business function, other

disadvantage of cost based transfer price

Selling division has no incentive to control costs. A "fair" markup may be difficult to determine

disadvantage of negotiated price

Takes time and effort. May lead to friction (or better understanding) between division managers

profit center

The Bakery Department of a Kroger grocery store reports income for the current year.

profit center

The Bakery department of Whole Foods​ Market, Inc., would be considered to be​ a(n)

profit center

The Floral Department at the​ Middletown, Maryland, Safeway grocery store would be considered to be​ a(n)

revenue center

The Foodservice Sales Territory Manager in charge of General​ Mills' Greater​ Baltimore/Washington, D.C., sales territory oversees​ a(n)

cost center

The Legal Department of the Progressive Group of Insurance Companies prepares its budget and subsequent performance report on the basis of its expected expenses for the year.

investment center

The Procter​ & Gamble Company​ headquarters, located in​ Cincinnati, Ohio, would be​ a(n)

Sales margin

The amount of income earned on every dollar of sales; a component of the ROI calculation computed as operating income divided by sales.

Capital turnover

The amount of sales revenue generated for every dollar of invested assets; a component of the ROI calculation computed as sales divided by total assets.

Weighted Average Cost of Capital (WACC)

The company's cost of capital; the target rate of return used in EVA calculations to represent the return that investors and long term creditors expect.

Residual Income (RI)

a measure of profitability and efficiency computed as actual operating income less a specified minimum acceptable operating income

Who does the decision making under the decentralized option?

delegated to unit managers

The frito-lay division of PepsiCo is most likely treated as a(n):

investment center

Lead indicators

performance measures that forecast future performance

A product line at Coca-Cola (such as the Diet Coke product line) is most likely treated as a(n):

profit center

selling division

wants highest price possible to max division's revenue → price charge is called "transfer price"

buying division

wants lowest price possible to minimize division's costs

investment center

​Baskin-Robbins is a subsidiary of​ Dunkin' Brands;​ Dunkin' Brands owns and operates nearly​ 2,500 ice cream specialty stores in the United States.

2 advantages of centralized option

-Avoids duplication of costs -Simplifies goal congruence

To be effective, performance evaluation system should do these three things:

-Clearly communicate expectations -Provide benchmarks that promote goal congruence -Motivate segment managers

2 disadvantages of decentralized option

-Duplicates certain cost or assets -Problems with goal congruence

3 advantages of ROI

-Expanded equation provides add'l information -Can be used to compare across divisions and with other companies -Useful for resourceful allocation

5 advantages of decentralized option

-Frees mgmnt time -Uses expert's knowledge -Improves customer relations -Provides training and experience -Increases managers' motivation and retention

5 disadvantages of centralized option

-Limits mgmnt time -Managers knowledge limited -Customer relations strained -Costly training for one -Decreases managers' motivation and retention

Flexible budget

A budget that is designed to cover a range of activity and that can be used to develop budgeted costs at any point within the range to compare to actual costs incurred

Investment center

A business unit within an entity that has responsibility for its own revenue, expenses, and assets. Management evaluates the investment center based on its return on those assets invested specifically in the investment center.

profit center

A charter airline records revenues and expenses for each airplane each month. Each​ airplane's performance report shows its​ income, including its revenue and expenses.

Cost center

A cost center is a business unit that is only responsible for the costs that it incurs. The manager of a cost center is not responsible for revenue generation or asset usage. The performance of a cost center is usually evaluated through the comparison of budgeted to actual costs

Balanced scorecard

A strategic management system based upon measuring key performance indivators across all aspects and areas of an enterprise: financial; customer; internal process; and learning and growth

Decentralized

A type of organizational structure in which daily operations and decision making responsibilities are delegated by top management to middle and lower level managers within the organizations, allowing top management to focus more on major decisions

Goal congruence

Aligning the goals of subunit managers with the goals of top management

advantage of negotiated price

Allows division manager to act autonomously rather than being dictated a transfer price by top management

Key performance indicator (KPI)

Also known as KPI or Key Success Indicators (KSI), help an organization define and measure progress toward organizational goals. Once an organization has analyzed its mission, identified all its stakeholders, and defined its goals, it needs a way to measure progress toward those goals. Key Performance Indicators are those measurements. They are quantifiable, agreed to beforehand, and reflect the critical success factors of an organization. They will differ depending on the organization.

disadvantage of market price

Can only be used if an outside market exists

performance reports

Compares actual revenues and expenses to budgeted figures

Benchmarking

Comparing actual performance to similar companies in the same industry, to other divisions, or to world-class standards

residual income

Determines whether the division has created any excess income above and beyond management's expectations

basic issue of responsibility accounting

How do we monitor, motivate, and reward managers so that they make decisions that are consistent with the company's long-run strategic objectives

learning and growth perspective

How will we sustain our ability to change and improve? Obj: foster an environment of creativity and innovation by hiring the most passionate and talented employees and investing heavily in research and development Measures: research and development spending, number of new patent applications, employee satisfaction

lower

Managers of cost and revenue centers are at _____ levels of the organization than are managers of investment centers.

transfer pricing can be at what 3 options?

Market price Cost-based transfer pricing Negotiated transfer pricing

return on investment formula

Net Operating Income / Average Operating Assets

Lag indicators

Performance measures that indicate past performance

drawback of ROI

Provides an incentive to select projects that are expected to increase ROI

performance evaluation

Provides mgmnt with feedback it needs to maintain control over the entire organization

Centralized

Refers to an organizational structure where all major planning decisions are made by top management

two common performance measures when evaluating investment centers

Return on investment (ROI) Residual income (RI)

Flexible budget variance

The difference arising because the company actually earned more or less revenue or incurred more or less cost than expected for the actual level of output

Sales Volume Variance

The difference between a static budget amount and a flexible budget amount arising only because the number of units actually sold differs from the static budget units.

Production volume variance

The difference between the manufacturing overhead cost in the flexible budget for actual outputs and the standard overhead allocated to production

profit center

The manager of the Speedway convenience store located on Verona Road in​ Madison, Wisconsin, is evaluated based on the​ store's revenues and expenses.

revenue center

The manager of the southeastern sales territory is evaluated based on a comparison of current period sales against budgeted sales.

profit center

The online division of​ David's Bridal,​ Inc., reports both revenues and expenses.

cost center; responsibility center

The payroll department of Target​ Corporation, a​ retailer, is​ a(n) _____. A _____ is any segment of the business whose manager is accountable for specific activities.

Product life cycle

The period of time over which an item is developed, brought to market and eventually removed from the market. First, the idea for a product undergoes research and development. If the idea is determined to be feasible and potentially profitable, the product will be produced, marketed and rolled out. Assuming the product becomes successful, its production will grow until the product becomes widely available. Eventually, demand for the product will decline and it will become obsolete

Management by exception

The practice of examining the financial and operational results of a business, and only bringing issues to the attention of management of results represent substantial differences from the budgeted or expected amount

cost center

The production line at the Honda plant in​ Lincoln, Alabama, where Honda Pilot sport utility vehicles are​ manufactured, is considered to be​ a(n)

profit center

The​ Boise, Idaho, location of the Olive Garden chain restaurant would be​ a(n)

cost center

Time Warner​ Inc.'s investor relations website provides operating and financial information to investors and other interested parties.

investment center

Toyota Motor North​ America, a division of Toyota Motor​ Corporation, is​ a(n)

Revenue center

Unit within an organization for which the manager is only responsible for generating revenues.

advantage of cost based transfer price

Useful if a market price is not available

advantage of market price

Usually viewed as fair by both parties

international business processes perspective

What internal processes are required to meet the needs of our customers, employees, and shareholders? Obj: design, manufacture, and deliver new products to market that exceed customer expectations in term of quantity, performance, and design Measures: percentage of new products launched, average days to market, mfg cycle time, inventory stockouts, number of defects

customer perspective

What value do we deliver to our customers? Obj: delight customers by providing them with new products and services with innovative design, superior ease of use, and exceptional post-sales support Measures: percentage of sales from new products, customer satisfaction, percentage of repeat customers, market share

financial perspective

What value do we provide for our shareholders? Obj: generate superior returns for shareholders Measures: sales growth, profitability, return on investment residual income, economic value added

Static budget

a budget prepared for only one level of sales volume

Profit center

a business segment whose manager has control over cost and revenue but has no control over investments in operating assets

Responsibility center

any part of an organization whose manager has control over and is accountable for cost, profit, or investments

favorable variance

causes operating income to be higher than budgeted

unfavorable variance

causes operating income to be lower than budgeted

The production line for HP Printers is most likely treated as a(N):

cost center

variance

difference between actual and budget

responsibility accounting

gives managers authority and responsibility for a particular part of the organization and then evaluates them based on the results of that area of the responsibility

residual income formula

operating income - (target rate or hurdle rate of return x total assets)

sales margin formula

operating income/sales

Who does the decision making under the centralized option?

owner/manager

transfer pricing

price charged for the internal sales of products between two different divisions of the same company

decentralization of responsibility

pushes decision making down to lower-level managers; often occurs as organizations continue to grow

The manager of the Midwest sales region at Pace Food would be in charge of a(n):

revenue center

revenue center

such as the Midwest sales region, managers are responsible for generalizing sales revenues

capital turnover formula

sales/total assets

application base of centralized option

small scope of operations

profit center

such as a line of products, managers are responsible both for generating income and controlling costs

cost center

such as a mfg plant, managers are responsible for controlling costs

investment center

such as the Frito-Lay division, managers are responsible for income and invested capital