ACG 6425 Unit 3/Final

gross margin ratio

(Net Sales - Cost of Goods Sold) / Net Sales

Porter Framework (Methods of Achieving Success)

- Cost leaders - Product differentiators - Focused competitors

advantages to ROI

-Easily understood by managers -Comparable to interest rates and the rates of return on alternative investments -Widely used and reported in the business press

Difficulties in Implementing Nonfinancial Performance Measurement Systems

-Fixation on financial measures -Reliability of nonfinancial measures -Lack of (immediate) correlation between Nonfinancial measures and financial results (the leading/lagging issue)

Advantages of Decentralization

-Knowledge of local requirements -Local sourcing -Less bureaucracy -Fast response to problems

drawbacks of financial performance measures

-Often not useful in identifying the cause of operational problems -Commonly reported only on a monthly,quarterly, or annual basis -Many people in the organization do not see how their work translates into financial results.

Disadvantages of Decentralization

-lower-level managers may make decisions without seeing the "big picture" -may be a lack of coordination among autonomous managers -lower-level manager's objectives may not be those of the organization -may be difficult to spread innovative ideas in the organization

3 elements of management control system

1. delegated decision authority 2. performance evaluation and measurement systems 3. compensation and reward systems

Financial Performance Measures

1. manufacturing cycle time: time involved in processing, moving, storing, and inspecting products and materials 2. manufacturing cycle efficiency: measure of the efficiency of the total manufacturing cycle; equals processing time divided by the manufacturing cycle time

foundations of business strategy

1. value proposition 2. mission 3. mission statement

participative budgeting

A budgetary approach that starts with input from lower-level managers and works upward so that managers at all levels participate.

Return on Investment (ROI)

A ratio of profit to capital used, or a rate of return from capital; computed by net profit after taxes divided by total assets

Direct Labor Rate Variance

APxAQ - SPxAQ

direct materials price variance

APxAQ - SPxAQ

Production budget

Allows management to plan for the resources needed to meet the current sales demand and ensure that inventory levels are sufficient for future sales

Cost allocations based on dual rates...

Assume that a common cost can be separated into a fixed component and a variable component

Establishing organization goals as a management function is more important:

At top management levels

Managers in a cost center are held responsible for...

Both the costs and volumes of inputs used to produce a product or provide a service.

progress relative to the competitive (benchmarking)

Continuous process of measuring a company's own products, services, and activities against competitors' performance

year over year improvement (continuous improvement)

Continuous reevaluation and improvement ofthe efficiency of the organization's activities

Under decentralization...

Decisions are made by more individuals, not fewer

Most organizations use residual income instead of return on investment (ROI) as a performance measure.

False, most organizations use ROI

In general, profit centers are found at higher levels in an organization than investment centers.

False.

traditional view of accounting and strategic success

Financial measures of performance (Profit, ROI) sum up successes/failures throughout the organization into one summary measure representing successful strategy

modern view of accounting and strategic success

Financial measures of performance cannot tell the whole story of strategic success

ROI decision rule

If ROI > (=) cost of capital, invest

When designing its performance evaluation system.

It is important to consider an organization's compensation and reward system

What is not a benefit of participative budgeting?

It reduces or eliminates the need for tracking actual cost activity.

Nonfinancial measures

More associated with operational objectives; evaluation not based on dollars

Profit Margin Ratio

Net Income/Sales

residual income

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

Partial Productivity

Partial productivity measures express the relation between output and only one input.

product differentiatiors

Produce low volumes of custom products where focus is more on innovation than efficiency; higher price, lower volume

cost leaders

Produce standardized products in high volumes as efficiently as possible; price is low, volume is high

Productivity

Productivity focuses on the efficient conversion of inputs into outputs. Computed by Output (quantity or value) / Single input such as labor (quantity or value)

direct labor efficiency variance

SPxAQ - SPxSQ

direct materials efficiency variance

SPxAQ - SPxSQ

focused competitor

Select a narrow segment of customers or products; Apply a combination of the cost leader and product differentiation strategies

Critical Success Factors (CSFs)

Strengths of a company that enable it to outperform competitors

principal-agent relationship

The relationship between a superior and subordinate. This relationship may be affected by the fact that each is motivated by self-interest, yet their interests may not be well aligned

Divisional income statements do not have to follow generally accepted accounting principles (GAAP) since they are internal reports.

True

Residual income is the difference between the divisional income and the cost of invested capital required to operate the division.

True Residual Income = After-tax income - (Cost of capital x Divisional assets)

Conflicting incentives

What's best for the principal may not be what's best for the agent

business strategy

a company's specific approach for deploying the organizational assets and capabilities required to meet its customers' needs competitively, while delivering the desired returns to shareholders

Total Factor Productivity (TFP)

a measure of productivity that explains changes in output other than those attributable to the amount of labor and capital, which is calculated by estimating the contributions of the quantity of capital and the quantity of labor to total output and then figuring out what is left over

management control system

a planned, ordered scheme of management control that allows managers to readily assess where the firm actually is at a point in time relative to where it wants or expects to be

master budget

a presentation of an organization's operational and financial budgets that represents the firm's overall plan of action for a specified time period

budgeted balance sheet

a projected financial statement that forecasts the types and amounts of assets a firm will need to implement its future plans and how the firm will finance those assets; prepared LAST

balanced scorecard

a set of four measures directly linked to a company's strategy: financial performance, customer knowledge, internal business processes, and learning and growth

Financial Ratios

calculations typically used to track a business's liquidity (cash), efficiency, and profitability over time compared to other businesses in its industry

An operating budget would not include a:

cash budget

operating assets

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

historical cost vs. current cost

current cost= cost to replace or rebuild an existing asset historical cost= original cost to purchase or build an asset

Divisional income statements

easy to understand, consider allocated common costs, decisions controlled by managers are reflected; not efficient in comparing divisions of different sizes

gross book value vs net book value

gross book value= the historical cost of the assets net book value= the historical cost of the assets less accumulated depreciation

how can ROI be improved?

increase sales, decrease assets, decrease costs

residual income decision

invest if residual income is =(>) 0 because the required return we needed (in dollars) is the equal to (or more than) the investment we put into the project --> accept

problems with ratio-based measures

managers can make decisions that lower organization performance but increase their own divisional performance (suboptimization)

in order to fully understand how a manager's decisions can affect ROI, both __ and ___ should be computed

margin and turnover

disadvantages to ROI

no direct measure about the value of the division; an imperfect reflection of the change in value

4 balanced scorecard measures

objectives, measures, targets, initiatives

Operating Margin

operating income/sales

business model

outlines the need the firm will fill, the operations of the business, its components and functions, as well as the expected revenues and expenses

Return on investment (ROI) can be decomposed into the asset turnover and the:

profit margin ratio

customer satisfaction performance measures

quality control, delivery performance, booking and purchase orders, market share

Economic Value Added (EVA)

the amount by which company profits (revenues, minus expenses, minus taxes) exceed the cost of capital in a given year

Decentralization

the delegation of the authority to make decisions in the organization's name to subordinates.

budget

the plan, stated in financial terms, of how an organization expects to carry out its activities and meet its goals

strategy map

visual representation of the four perspectives of the balanced scorecard that enables managers to communicate their goals so that everyone in the company can understand how their jobs are linked to the overall objectives of the organization