Chapter 11: Responsibility Accounting Systems

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Net Operating Income

Sales - Expenses

Turnover

Sales / Average Operating Assets

Net Book Value

acquisition cost - accumulated depreciation

EBIT

earnings before interest and taxes

non-operating assets

ex: land held for future use, building rented to someone, marketable securities

Net Income

income before interest and taxes (EBIT)

Value-added time

process time

throughput time

process time + inspection time + move time + queue time (all except wait time)

Increased operating expenses can

reduce (decrease) ROI and depress margin and ROI

When a manager has control over and is accountable for cost, profit or investments of an organization, it is called

responsibility center

Which two criteria are used to evaluate the performance of an investment center?

return on investment (ROI) and residual income

Turnover

the investment in operating assets (manager responsibility)

Residual Income

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

manufacturing cycle efficiency

value added time / throughput time

Delivery Cycle Time

wait time + throughput time

Average Operating Assets

(beginning net book value of operating assets + ending net book value of operating assets) / 2

Juniper Design Ltd. of Manchester, England, provides design services to residential developers. Last year, the company had net operating income of $600,000 on sales of $3,000,000. The company's average operating assets for the year were $2,800,000 and its minimum required rate of return was 18%

600,000 - (2,800,000 x 18%)= $96,000

operation performance measurement

????

Return on Investment (ROI) (best for managers)

Margin x Turnover

Residual Income formula

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

Return on Investment (ROI)

Net Operating Income / Average Operating Assets

Margin

Net Operating Income / Sales

Systems Corporation earned a net operating income of $2 million on sales of $6 million. Assume that the company's average operating assets were $20 million. What is the company's ROI?

ROI = Net operating income / Average operating assets = $2 million ÷ $20 million = 10%

Axis Corporation's Division A has average operating assets of $500,000 and the division earned $100,000 as net operating income during a period. The company expects a minimum required rate of return of 15% on its investments. What is the residual income for Division A?

Residual income = $100,000 − ($500,000 × 15%) = $100,000 − $75,000 = $25,000

A major drawback of residual income is that it

cannot be used to compare the performances of divisions of different sizes

Average Operating Assets

current assets + non current assets

Margin can be increased by

increasing selling prices, increasing units sales, reducing operating expenses

Residual income is a better measure for performance evaluation of an investment center manager than return on investment because

it encourages managers to make investments that are profitable for the entire company


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