Managerial Ch 12

Balanced Scorecards

An integrated set of performance measure that are derived from the company's strategy. -Financial -Customer -Internal Business Processes -Learning & Growth

NOI is income before

Interest & Taxes

Strength of using ROI to eval segment performance:

ROI does not include the investment in non operating assets, such as land held for investment or stock in other companies.

Disadvantage of decentralization:

lower level management goals are inconsistent with company goals

When evaluating decisions of different size:

management should focus on % change in residual income from year to year

Cost Center Managers are expected to:

minimize costs, while providing an acceptable level of service

Mfg Cycle Efficiency (MCE) =

value-added time (process time) / Throughput (mfg cycle) time

Valid criticism of evaluating performances based on return on investment (ROI)

- A manager may reject investment opportunities that are profitable for the company but have a negative impact on the manager's ROI. - A manager may be put in charge of a business segment that includes committed costs over which the manager has no control. - Managers may take actions that increase ROI in the short run at the expense of long term performance.

When comparing projects using residual income vs ROI:

-A manager might reject a proposal using ROI that the manager would accept using residual income. -Residual income cannot be used to compare divisions of different sizes without some modification.

Increase return on investment (ROI) by:

-Reducing operating expenses -Increasing sales

Mfg Cycle Efficiency means:

-value added activities are being performed % of the time. -the typical order is being worked on % of the time.

Profit center managers are evaluated by comparing:

Actual profit to budgeted profit

Minimum required return =

Average operating assets x required rate of return

Operating Assets

Cash, A/R, Inventory, Plant & Equipment,

An organization in which decision making authority is spread throughout the organization

Decentralized

To increase ROI:

Increase Sales, Decrease operating expenses, Decrease average operating assets.

Non value added activities =

MCE - 1

Profit Center

Manager has control over both costs and revenue, but not over the use of investment funds

Cost Center

Manager has control over costs, but not revenue or the use of investment funds.

Investment (Responcibility) Center

Manager has the control over costs, revenues, and the investment in operating assets.

Managers can improving either:

Margin or Turnover

Residual income =

NOI - (Average operating assets x required rate of return)

A manger who is evaluated based on Residual Income decide to invest in project by:

NOI for the investment should be above the minimum required return on average operating assets.

Return on Investment

NOI/Average Operating Assets NOI/Sales (Margin) x Sales/Average Operating Assets (Turnover) -Margin multiplied by turnover

Throughput time =

Process Time + Inspection Time + Move Time + Queue TIme

The net operating income that an investment center earns above the minimum required return on its average operating assets is :

Residual Income

The period for which a product begins production as raw materials and ends as a finished product is:

Throughput time (mfg cycle time)

Under the balanced scorecard approach, managers should be evaluated on:

Trends in the performance measure over time.

Delivery Cycle time

Wait Time + Process Time + Inspection Time + Move Time + Queue TIme

In strongly centralized organizations:

decision making authority lies with higher level managers.

operating performance measures:

help identify what drives organizational performance

Using a balanced scorecard, top management can translate the company's strategy into:

performance measures that the employees can understand and influence.

When a manager accepts a project because the NOI from the investment exceeds the minimum acceptable profit based on required rate of return, the investment was evaluated based on:

residual income.

lower level managers decision making authority can be linked to the outcomes of those decisions through:

responsibility accounting systems

The higher a business segment's ROI:

the greater the profit earned per dollar invested in the segment's average operating assets.

Decentralized operations are able to respond quickly to customers and changes in operations because:

there are fewer managers that must be consulted before a decision is made.

When one division sells to another:

transfer price