Lecture Fundamentals of cost accounting (4th edition): Chapter 14 - Lanen, Anderson, Maher

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Lecture Fundamentals of cost accounting (4th edition): Chapter 14 - Lanen, Anderson, Maher

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(BQ) Chapter 14: Business unit performance measurement. We described the organization of the firm in Chapter 12 by referring to responsibility centers: cost centers, profit centers, and investment centers. In this chapter, we develop and analyze performance measures for investment centers. Recall that in an investment center, managers have responsibility for asset deployment in addition to revenue and cost responsibilities.

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Nội dung Text: Lecture Fundamentals of cost accounting (4th edition): Chapter 14 - Lanen, Anderson, Maher

  1. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
  2. Business Unit Performance Measurement Chapter 14 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA McGraw­Hill/Irwin Copyright © 2014 by The McGraw­Hill Companies, Inc. All rights reserved.
  3. Learning Objectives LO 14-1 Evaluate divisional accounting income as a performance measure. LO 14-2 Interpret and use return on investment (ROI). LO 14-3 Interpret and use residual income (RI). LO 14-4 Interpret and use economic value added (EVA). LO 14-5 Explain how historical cost and net book value-based accounting measures can be misleading in evaluating performance. 14­3
  4. Divisional Performance Measurement As we develop performance measures, our discussion will be guided by three considerations. 1. Is the performance measure consistent with the decision 1.Is authority of the manager? 2.Does the measure reflect the results of those actions that improve the performance of the organization? 3. What actions might managers be taking that improve reported performance but are actually detrimental to organizational performance? 14­4
  5. LO 14-1 Accounting Income LO 14-1 Evaluate divisional accounting income as a performance  measure. Divisional Income Division revenues minus division costs Investors use accounting income to assess a firm's performance. Firms use a division’s income to Assess divisional performance. 14­5
  6. LO 14-1  Divisional Income 14­6
  7.  Advantages and Disadvantages LO 14-1 of Divisional Income • It is easy to understand. • Decisions controlled by the manager are reflected. • Results of decisions affecting revenues and costs are summarized. • It makes comparison of divisions easy. 14­7
  8.  Advantages and Disadvantages LO 14-1 of Divisional Income • Since the size of the division may have an impact, it may not reflect performance of divisional managers • It does not determine if managers are making good decisions regarding the use of assets 14­8
  9. LO 14-1 Some Simple Financial Ratios Mustang Fashions Selected Financial Ratios For Year 1 14­9
  10. LO 14-2 Return on Investment LO 14-2 Interpret and use return on investment (ROI). Return on Investment (ROI) Ratio of profits to investment in the asset that generates those profits Provides a comparison of different size divisions 14­10
  11. LO 14-2 Return on Investment 14­11
  12. LO 14-2 Return on Investment 14­12
  13. LO 14-2 Return on Investment 14­13
  14. LO 14-2 Limitations of ROI • Short-term focus (myopia) from accounting information • Conflicting incentives for managers (suboptimization) 14­14
  15. LO 14-2 Limitations of ROI Increase sales Decrease costs Decrease assets 14­15
  16. LO 14-2 Limitations of ROI An Example: Mustang Fashions Mustang Fashions requires a return on investments of 20%. Current division performance Western: 22% Eastern: 24% 14­16
  17. LO 14-2 Limitations of ROI Should an investment be made if the following returns are expected? Company: ≥ 20% Western Division: ≥ 22% Eastern Division: ≥ 24% 14­17
  18. LO 14-2 Limitations of ROI Organization 20% Western Division Eastern Division Manager Manager 22% 24% Conflicting Incentives The division managers’ goals differ from the organization’s goals. 14­18
  19. LO 14-3 Residual Income Measures LO 14-3 Interpret and use residual income (RI). Residual Income (RI) This is the excess of actual profit over the cost of invested capital in the unit. 14­19
  20. LO 14-3 Residual Income Measures Cost of Capital This is the opportunity cost of the resources (equity and debt capital) invested in the business. 14­20



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