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