accounting Research Paper
usaksa
dd.pptPowerPoint 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
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Performance Measurement in Decentralized Organizations
Chapter 11
11-*
Decentralization in Organizations
Benefits of
Decentralization
Top management
freed to concentrate
on strategy.
Lower-level decisions
often based on
better information.
Lower level managers can respond quickly to customers.
Lower-level managers
gain experience in
decision-making.
Decision-making
authority leads to
job satisfaction.
11-*
Decentralization in Organizations
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.
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Responsibility Accounting
Responsibility
Center
Cost
Center
Profit
Center
Investment
Center
Cost, profit,
and investment
centers are all
known as
responsibility
centers.
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Cost Center
A segment whose manager has control over costs, but not over revenues or investment funds.
11-*
Profit Center
A segment whose manager has control over both costs and revenues,
but no control over investment funds.
Revenues
Sales
Interest
Other
Costs
Mfg. costs
Commissions
Salaries
Other
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Investment Center
A segment whose manager has control over costs, revenues, and investments in operating assets.
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Learning Objective 1
Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI.
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Return on Investment (ROI) Formula
Cash, accounts receivable, inventory,
plant and equipment, and other
productive assets.
Income before interest
and taxes (EBIT)
ROI =
Net operating income
Average operating assets
11-*
Net Book Value versus Gross Cost
Most companies use the net book value of depreciable assets to calculate average operating assets.
Sheet1
| Pipe Products | ||||||||
| 9-Inch | 12-Inch | 18-Inch | Total | |||||
| Warehouse sq. ft. | 1,000 | 4,000 | 5,000 | 10,000 | ||||
| Lease price per sq. ft. | $ 4 | $ 4 | $ 4 | $ 4 | ||||
| Total lease cost | $ 4,000 | $ 16,000 | $ 20,000 | $ 40,000 | ||||
| Acquisition cost | ||||||||
| Less: Accumulated depreciation | ||||||||
| Net book value |
Sheet2
Sheet3
11-*
Understanding ROI
Margin =
Net operating income
Sales
Turnover =
Sales
Average operating assets
ROI =
Margin Turnover
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Increasing ROI – An Example
Regal Company reports the following:
Net operating income $ 30,000
Average operating assets $ 200,000
Sales $ 500,000
Operating expenses $ 470,000
What is Regal Company’s ROI?
ROI =
Margin Turnover
Net operating income
Sales
Sales
Average operating assets
×
ROI =
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Increasing ROI – An Example
$30,000
$500,000
×
$500,000
$200,000
ROI =
6% 2.5 = 15%
ROI =
ROI =
Margin Turnover
Net operating income
Sales
Sales
Average operating assets
×
ROI =
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Investing in Operating Assets to Increase Sales
Assume that Regal's manager invests in a $30,000 piece of equipment that increases sales by $35,000, while increasing operating expenses by $15,000.
Let’s calculate the new ROI.
Regal Company reports the following:
Net operating income $ 50,000
Average operating assets $ 230,000
Sales $ 535,000
Operating expenses $ 485,000
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Investing in Operating Assets to Increase Sales
ROI increased from 15% to 21.8%.
$50,000
$535,000
×
$535,000
$230,000
ROI =
9.35% 2.33 = 21.8%
ROI =
ROI =
Margin Turnover
Net operating income
Sales
Sales
Average operating assets
×
ROI =
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Criticisms of ROI
In the absence of the balanced
scorecard, management may
not know how to increase ROI.
Managers often inherit many
committed costs over which
they have no control.
Managers evaluated on ROI
may reject profitable
investment opportunities.
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Learning Objective 2
Compute residual income and understand its strengths and weaknesses.
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Residual Income - Another Measure of Performance
Net operating income
above some minimum
return on operating
assets
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Calculating Residual Income
(
)
This computation differs from ROI.
ROI measures net operating income earned relative to the investment in average operating assets.
Residual income measures net operating income earned less the minimum required return on average operating assets.
Sheet1
| Pipe Products | |||||||||||||||||||
| 9-Inch | 12-Inch | 18-Inch | Total | ||||||||||||||||
| Warehouse sq. ft. | 1,000 | 4,000 | 5,000 | 10,000 | |||||||||||||||
| Lease price per sq. ft. | $ 4 | $ 4 | $ 4 | $ 4 | ´ | ||||||||||||||
| Total lease cost | $ 4,000 | $ 16,000 | $ 20,000 | $ 40,000 | |||||||||||||||
| Acquisition cost | |||||||||||||||||||
| Less: Accumulated depreciation | |||||||||||||||||||
| Net book value | |||||||||||||||||||
| Residual income | = | Net operating income | - | Average operating assets | ´ | Minimum required rate of return |
Sheet2
Sheet3
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Residual Income – An Example
The Retail Division of Zephyr, Inc. has average operating assets of $100,000 and is required to earn a return of 20% on these assets.
In the current period, the division earns $30,000.
Let’s calculate residual income.
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Residual Income – An Example
Sheet1
| Operating assets | $ 100,000 | |||
| Required rate of return | × | 20% | ||
| Minimum required return | $ 20,000 |
Sheet1
| Actual income | $ 30,000 | |||
| Minimum required return | (20,000) | |||
| Residual income | $ 10,000 |
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Motivation and Residual Income
Residual income encourages managers to
make profitable investments that would
be rejected by managers using ROI.
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Quick Check
Redmond Awnings, a division of Wrap-up Corp., has a net operating income of $60,000 and average operating assets of $300,000. The required rate of return for the company is 15%. What is the division’s ROI?
a. 25%
b. 5%
c. 15%
d. 20%
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Quick Check
Redmond Awnings, a division of Wrap-up Corp., has a net operating income of $60,000 and average operating assets of $300,000. The required rate of return for the company is 15%. What is the division’s ROI?
a. 25%
b. 5%
c. 15%
d. 20%
ROI = NOI/Average operating assets
= $60,000/$300,000 = 20%
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Quick Check
Redmond Awnings, a division of Wrap-up Corp., has a net operating income of $60,000 and average operating assets of $300,000. If the manager of the division is evaluated based on ROI, will she want to make an investment of $100,000 that would generate additional net operating income of $18,000 per year?
a. Yes
b. No
11-*
Quick Check
Redmond Awnings, a division of Wrap-up Corp., has a net operating income of $60,000 and average operating assets of $300,000. If the manager of the division is evaluated based on ROI, will she want to make an investment of $100,000 that would generate additional net operating income of $18,000 per year?
a. Yes
b. No
ROI = $78,000/$400,000 = 19.5%
This lowers the division’s ROI from 20.0% down to 19.5%.
11-*
Quick Check
The company’s required rate of return is 15%. Would the company want the manager of the Redmond Awnings division to make an investment of $100,000 that would generate additional net operating income of $18,000 per year?
a. Yes
b. No
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Quick Check
The company’s required rate of return is 15%. Would the company want the manager of the Redmond Awnings division to make an investment of $100,000 that would generate additional net operating income of $18,000 per year?
a. Yes
b. No
ROI = $18,000/$100,000 = 18%
The return on the investment exceeds the minimum required rate of return.
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Quick Check
Redmond Awnings, a division of Wrap-up Corp., has a net operating income of $60,000 and average operating assets of $300,000. The required rate of return for the company is 15%. What is the division’s residual income?
a. $240,000
b. $ 45,000
c. $ 15,000
d. $ 51,000
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Quick Check
Redmond Awnings, a division of Wrap-up Corp., has a net operating income of $60,000 and average operating assets of $300,000. The required rate of return for the company is 15%. What is the division’s residual income?
a. $240,000
b. $ 45,000
c. $ 15,000
d. $ 51,000
Net operating income $60,000
Required return (15% of $300,000) (45,000)
Residual income $15,000
11-*
Quick Check
If the manager of the Redmond Awnings division is evaluated based on residual income, will she want to make an investment of $100,000 that would generate additional net operating income of $18,000 per year?
a. Yes
b. No
11-*
Quick Check
If the manager of the Redmond Awnings division is evaluated based on residual income, will she want to make an investment of $100,000 that would generate additional net operating income of $18,000 per year?
a. Yes
b. No
Net operating income $78,000
Required return (15% of $400,000) (60,000)
Residual income $18,000
Yields an increase of $3,000 in the residual income.
11-*
Divisional Comparisons and Residual Income
The residual income approach has one major disadvantage.
It cannot be used to compare the performance of divisions of different sizes.
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Zephyr, Inc. - Continued
Recall the following information for the Retail Division of Zephyr, Inc.
Assume the following information for the Wholesale Division of Zephyr, Inc.
Sheet1
| Retail | Wholesale | ||||
| Operating assets | $ 100,000 | $ 1,000,000 | |||
| Required rate of return | × | 20% | 20% | ||
| Minimum required return | $ 20,000 | $ 200,000 | |||
| Retail | Wholesale | ||||
| Actual income | $ 30,000 | $ 220,000 | |||
| Minimum required return | (20,000) | (200,000) | |||
| Residual income | $ 10,000 | $ 20,000 |
11-*
Zephyr, Inc. - Continued
The residual income numbers suggest that the Wholesale Division outperformed the Retail Division because its residual income is $10,000 higher. However, the Retail Division earned an ROI of 30% compared to an ROI of 22% for the Wholesale Division. The Wholesale Division’s residual income is larger than the Retail Division simply because it is a bigger division.
Sheet1
| Retail | Wholesale | ||||
| Operating assets | $ 100,000 | $ 1,000,000 | |||
| Required rate of return | × | 20% | 20% | ||
| Minimum required return | $ 20,000 | $ 200,000 | |||
| Retail | Wholesale | ||||
| Actual income | $ 30,000 | $ 220,000 | |||
| Minimum required return | (20,000) | (200,000) | |||
| Residual income | $ 10,000 | $ 20,000 |
11-*
Learning Objective 3
Compute delivery cycle time, throughput time, and manufacturing cycle efficiency (MCE).
11-*
Process time is the only value-added time.
Delivery Performance Measures
Wait Time
Process Time + Inspection Time
+ Move Time + Queue Time
Delivery Cycle Time
Order Received
Production
Started
Goods Shipped
Throughput Time
11-*
Delivery Performance Measures
Wait Time
Process Time + Inspection Time
+ Move Time + Queue Time
Manufacturing
Cycle
Efficiency
Value-added time
Manufacturing cycle time
=
Delivery Cycle Time
Order Received
Production
Started
Goods Shipped
Throughput Time
11-*
Quick Check
A TQM team at Narton Corp has recorded the following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.
11-*
A TQM team at Narton Corp has recorded the following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.
Quick Check
Throughput time = Process + Inspection + Move + Queue
= 0.2 days + 0.4 days + 0.5 days + 9.3 days
= 10.4 days
11-*
Quick Check
A TQM team at Narton Corp has recorded the following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%.
b. 1.9%.
c. 52.0%.
d. 5.1%.
11-*
A TQM team at Narton Corp has recorded the following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%.
b. 1.9%.
c. 52.0%.
d. 5.1%.
Quick Check
MCE = Value-added time ÷ Throughput time
= Process time ÷ Throughput time
= 0.2 days ÷ 10.4 days
= 1.9%
11-*
Quick Check
A TQM team at Narton Corp has recorded the following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
c. 13.4 days.
d. 10.4 days.
11-*
A TQM team at Narton Corp has recorded the following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
c. 13.4 days.
d. 10.4 days.
Quick Check
DCT = Wait time + Throughput time
= 3.0 days + 10.4 days
= 13.4 days
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Learning Objective 4
Understand how to construct and use a balanced scorecard.
11-*
The Balanced Scorecard
Management translates its strategy into performance measures that employees understand and influence.
Performance
measures
Customer
Learning
and growth
Internal
business
processes
Financial
11-*
The Balanced Scorecard: From
Strategy to Performance Measures
Financial
Has our financial
performance improved?
Customer
Do customers recognize that
we are delivering more value?
Internal Business Processes
Have we improved key business processes so that we can deliver more value to customers?
Learning and Growth
Are we maintaining our ability
to change and improve?
Performance Measures
What are our
financial goals?
What customers do
we want to serve and
how are we going to
win and retain them?
What internal busi-
ness processes are
critical to providing
value to customers?
Vision and Strategy
11-*
The Balanced Scorecard:
Non-financial Measures
The balanced scorecard relies on non-financial measures in addition to financial measures for two reasons:
- Financial measures are lag indicators that summarize
the results of past actions. Non-financial measures are
leading indicators of future financial performance.
- Top managers are ordinarily responsible for financial
performance measures – not lower level managers.
Non-financial measures are more likely to be
understood and controlled by lower level managers.
11-*
The Balanced Scorecard for Individuals
A personal scorecard should contain measures that can be
influenced by the individual being evaluated and that
support the measures in the overall balanced scorecard.
The entire organization should have an overall balanced scorecard.
Each individual should have a personal balanced scorecard.
11-*
The balanced scorecard lays out concrete actions to attain desired outcomes.
A balanced scorecard should have measures
that are linked together on a cause-and-effect basis.
If we improve
one performance
measure . . .
Another desired
performance measure
will improve.
The Balanced Scorecard
Then
11-*
The Balanced Scorecard and Compensation
Incentive compensation should be linked to
balanced scorecard performance measures.
11-*
The Balanced Scorecard ─ Jaguar Example
Employee skills in installing options
Number of
options available
Time to
install option
Customer satisfaction
with options
Number of cars sold
Contribution per car
Profit
Learning
and Growth
Internal Business Processes
Customer
Financial
11-*
Strategies
Results
The Balanced Scorecard ─ Jaguar Example
Increase Options
Time
Decreases
Increase
Skills
Employee skills in installing options
Number of
options available
Time to
install option
Customer satisfaction
with options
Number of cars sold
Contribution per car
Profit
Satisfaction Increases
11-*
Results
The Balanced Scorecard ─ Jaguar Example
Employee skills in installing options
Number of
options available
Time to
install option
Customer satisfaction
with options
Number of cars sold
Contribution per car
Profit
Cars sold Increase
Satisfaction Increases
11-*
Results
The Balanced Scorecard ─ Jaguar Example
Employee skills in installing options
Number of
options available
Time to
install option
Customer satisfaction
with options
Number of cars sold
Contribution per car
Profit
Time
Decreases
Contribution
Increases
Satisfaction Increases
11-*
The Balanced Scorecard ─ Jaguar Example
Results
If number
of cars sold
and contribution
per car increase,
profit should
increase.
Employee skills in installing options
Number of
options available
Time to
install option
Customer satisfaction
with options
Number of cars sold
Contribution per car
Profit
Contribution
Increases
Profits
Increase
Cars Sold Increases
11-*
End of Chapter 11
Acquisition cost
Less: Accumulated depreciation
Net book value
Residual
income
=
Net
operating
income
-
Average
operating
assets
Minimum
required rate of
return
Operating assets100,000$
Required rate of return×20%
Minimum required return20,000$
Actual income30,000$
Minimum required return(20,000)
Residual income10,000$
RetailWholesale
Operating assets100,000$ 1,000,000$
Required rate of return×20%20%
Minimum required return20,000$ 200,000$
RetailWholesale
Actual income30,000$ 220,000$
Minimum required return(20,000) (200,000)
Residual income10,000$ 20,000$
