9 Flashcards
What are examples of financial and non-financial measures of performance?
Financial Measures: Operating profit, ROI (Return on Investment), RI (Residual Income), EVA (Economic Value Added).
Non-Financial Measures: Customer satisfaction, product quality, innovation, efficiency, and time measures.
Many organizations use these measures together in tools like the Balanced Scorecard.
What are the steps to design an accounting-based performance measure?
Align measures with management goals.
Choose the time horizon (e.g., short-term or long-term).
Define each measure clearly.
Select a measurement method (e.g., historical or current cost).
Set a target performance level.
Determine the timing of feedback (e.g., monthly, quarterly).
What is the DuPont method of profitability analysis?
The DuPont method breaks down ROI (Return on Investment) into:
Investment Turnover: Revenues ÷ Investment.
Return on Sales: Profit ÷ Revenues.
ROI = Investment Turnover × Return on Sales.
This helps analyze profitability drivers, such as asset efficiency and cost control.
What is the Residual Income (RI) measure?
Residual Income (RI) measures the profit left after subtracting the required return on investments.
This approach encourages managers to accept projects that generate value above the required return, even if they reduce the overall ROI. This aligns divisional and organizational goals, promoting better decision-making and goal congruence.
What is Economic Value Added (EVA®)?
EVA adjusts Residual income to focus on after-tax profits and the cost of capital, ensuring managers only invest in projects that exceed the company’s capital cost.
What is the difference between current-cost and historical-cost asset measurement?
Current Cost: Reflects the cost of replacing an asset today. It provides a more accurate view of investment performance but is harder to estimate.
Historical Cost: Based on the original cost minus depreciation. It is easier to calculate but may not reflect current asset value.
What role do salaries and incentives play in compensation?
Salaries provide income stability, while incentives motivate employees to improve performance. A balance between the two minimizes risk for employees while encouraging alignment with organizational goals.
What is the role of a management accountant in designing incentive systems?
Management accountants play a key role in creating effective incentive systems by designing performance measures that accurately reflect employee actions and minimize the influence of uncontrollable external factors. They set clear and achievable benchmarks, evaluate both team and individual contributions, and ensure the performance measures align with the overall goals of the organization. This helps motivate employees while promoting fairness and goal congruence.
What incentive problems arise when employees perform multiple tasks?
When employees are responsible for multiple tasks, they may prioritize one task (e.g., speed) over others (e.g., quality) to meet specific performance targets. This can lead to imbalances, such as producing quickly but with errors. To address this, management must balance incentives to ensure all tasks are given appropriate attention. Solutions include linking bonuses to customer satisfaction, tracking quality metrics, or implementing quality monitoring systems to encourage well-rounded performance.
What are the limitations of ROI?
It may discourage managers from accepting projects that lower divisional ROI, even if they benefit the company overall.
Managers may focus only on short-term gains, neglecting long-term investments.
It doesn’t consider the cost of capital, unlike RI or EVA.
