ch 11 acg

weaknesses of ROI

-In the absence of the balanced scorecard, management may not know how to increase ROI. -Managers often inherit many committed costs over which they have no control. -Managers evaluated on ROI may reject profitable investment opportunities.

the balanced scorecard

-Management translates its strategy into performance measures that employees understand and influence. -performance measures: financial, customer, internal business processes, learning and growth -A balanced scorecard should have measuresthat are linked together on a cause-and-effect basis.

difference btwn ROI and residual income

-ROI measures net operating income earned relative to the investment in average operating assets. -Residual income measures net operating income earned less the minimum required return on average operating assets.

benefits of residual income

-Residual income encourages managers to make profitable investments that would be rejected by managers using ROI.

Profit Center

A segment whose manager has control over both costs and revenues, but no control over investment funds.

cost center

A segment whose manager has control over costs, but not over revenues or investment funds.

investment center

A segment whose manager has control over costs, revenues, and investments in operating assets.

Which of the following will not result in an increase in return on investment (ROI), assuming other factors remain the same?

An increase in operating assets

average operating assets

Cash, accounts receivable, inventory,plant and equipment, and other productive assets.

responsibility centers

Cost, profit, and investment centers

All other things equal, which of the following would increase a division's residual income? a. Increase in expenses b. Decrease in average operating assets c. Increase in minimum required return d. Decrease in net operating income

Decrease in average operating assets

net operating income

Income before interest and taxes (EBIT)

net income another equation

NOI = CM - FE

residual income equation

Net Operating Income - (Average Operating Assets x Minimum Required Rate of Return)

margin equation

Net Operating Income / Sales

Residual Income

Residual Income is net operating income above some minimum return on operating assets.

turnover equation

Sales / Average Operating Assets

disadvantages of residual income

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

Return on Investment (ROI) equation

net operating income/ average operating assets margin x turnover net operating income/ sales x sales/average operating assets

A balanced scorecard contains both customer and internal business process performance measures because improvements in internal business process should result in improvements in customer satisfaction.

true

Financial measures such as ROI and residual income as well as operating measures may be included in a balanced scorecard.

true