ACCT 2302 CH.9 Questions

what is meant by residual income

Residual income is the net operating income an investment center earns above the company's minimum required rate of return on operating assets.

Why does the balanced scorecard include financial performance measures as well as measures of how well internal business processes are doing?

The balanced scorecard is constructed to support the company's strategy, which is a theory about what actions will further the company's goals. Assuming that the company has financial goals, measures of financial performance must be included in the balanced scorecard as a check on the reality of the theory. If the internal business processes improve, but the financial outcomes do not improve, the theory may be flawed and the strategy should be changed.

Why do the measures used in a balanced scorecard differ from company to company?

A company's balanced scorecard should be derived from and support its strategy. Because different companies have different strategies, their balanced scorecards should be different.

What does manufacturing cycle efficiency (MCE) of less than 1 mean? How would you interpret an MCE of .4?

An MCE of less than 1 means that the production process includes non-value-added time. An MCE of 0.40, for example, means that 40% of throughput time consists of actual processing, and that the other 60% consists of moving, inspection, and other non-value-added activities.

in what way can the use of ROI as a performance measure for investment centers lead to bad decisions? How does the residual income approach overcome this problem?

If ROI is used to evaluate performance, a manager of an investment center may reject a profitable investment opportunity whose rate of return exceeds the company's required rate of return but whose rate of return is less than the investment center's current ROI. The residual income approach overcomes this problem because any project whose rate of return exceeds the company's minimum required rate of return will result in an increase in residual income.

What is meant by the term decentralization?

In a decentralized organization, decision-making authority isn't confined to a few top executives; instead, decision-making authority is spread throughout the organization.

what is meant by the terms margin and turnover in ROI calculations

Margin is the ratio of net operating income to total sales. Turnover is the ratio of total sales to average operating assets. The product of the two numbers is the ROI.

What benefits come from decentralization?

The benefits of decentralization include: (1) by delegating day-to-day problem solving to lower-level managers, top management can concentrate on bigger issues such as overall strategy; (2) empowering lower-level managers to make decisions puts decision-making authority in the hands of those who tend to have the most detailed and up-to-date information about day-to-day operations; (3) by eliminating layers of decision-making and approvals, organizations can respond more quickly to customers and to changes in the operating environment; (4) granting decision-making authority helps train lower-level managers for higher-level positions; and (5) empowering lower-level managers to make decisions can increase their motivation and job satisfaction.

What is the difference between delivery cycle time time and throughput time? what four elements make up throughput time? What elements of throughput time are value-added and what elements are non-value added?

The difference between delivery cycle time and throughput time is the waiting period between when an order is received and when production on the order is started. Throughput time is made up of process time, inspection time, move time, and queue time. Process time is value-added time and inspection time, move time, and queue time are non-value-added time.

Distinguish between cost center, profit center, and investment center

The manager of a cost center has control over cost, but not revenue or the use of investment funds. A profit center manager has control over both cost and revenue. An investment center manager has control over cost and revenue and the use of investment funds.