Chapter 11

residual income equation

=net operating income-(average operating assets x minimum required rate of return)

return on investment (ROI) equation

=net operating income/average operating assets OR =margin x turnover

margin equation

=net operating income/sales

throughput time equation

=process time+inspection time+move time+queue time

turnover equation

=sales/average operating assets

manufacturing cycle efficiency (MCE) equation

=value-added time/throughput time

delivery cycle time equation

=wait time+throughput time

profit center

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

cost center

A business segment whose manager has control over cost but has no control over revenue or investments in operating assets.

investment center

A business segment whose manager has control over cost, revenue, and investments in operating assets.

Economic Value Added (EVA)

A concept similar to residual income in which a variety of adjustments may be made to GAAP financial statements for performance evaluation purposes.

balanced scorecard

An integrated set of performance measures that are derived from and support the organization's strategy.

decentralized organization

An organization in which decision-making authority is not confined to a few top executives but rather is spread throughout the organization.

responsibility center

Any business segment whose manager has control over costs, revenues, or investments in operating assets.

operating assets

Cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes.

net operating income

Income before interest and income taxes have been deducted.

return on investment (ROI)

Net operating income divided by average operating assets. It also equals margin multiplied by turnover.

margin

Net operating income divided by sales.

manufacturing cycle efficiency (MCE)

Process (value-added) time as a percentage of throughput time.

turnover

Sales divided by average operating assets.

throughput time

The amount of time required to turn raw materials into completed products.

delivery cycle time

The elapsed time from receipt of a customer order to when the completed goods are shipped to the customer.

residual income

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