Ch 23 Flashcards
Investment
Resources or assets used to generate income
3 steps to designing accounting based performance measures?
1 choose performance measures that align with top
Management’s financial goals
2 choose details of each performance measure
3 choose target level performance and feedback mechanism
For each performance measure
Return on investment (ROI), 2 equations
Return on investment = income/investment
ROI = return on sales x investment turnover
Residual income (RI), equation
Residual income = income - (required rate of return x investment)
Imputed cost equation
Imputed cost = required rate of return x investment
Imputed cost of the investment
Cosy recognized in some situations but not recorded In
financial accounting systems because it’s an opportunity cost
Economic value added (EVA), definition, equation
Specific type of residual income calculation
EVA =
after tax operating income -
[weighted avg. cost of capital x (total assets - current liabilities)]
Return on sales, equation
Return on sales (ROS) = operating income/revenues
4 common alternative definitions used in construction of accounting based performance?
1 total assets available
2 total assets employed
3 total assets employed minus current liabilities
4 stockholder’s equity
Total assets employed
Total assets available minus sum of idle assets and assets
Purchased for future expansion
Gross book value
Original cost
Current cost
Cost of purchasing an asset today identical to 1 currently
Held
Or cost of purchasing asset that provides services like
1 currently held if identical asset can’t be purchased
Moral hazard
Situation where employee prefers to exert less effort
Compared with effort desired by owner
Because employees effort can’t be accurately monitored
Or enforced
Diagnostic control systems
Quantitative financial and no financial performance measures
That help diagnose if company is performing to expectations
Boundary systems
Standards of behavior and codes of conduct expected of
All employees, especially actions that are off limits
Belief systems
Mission, purpose and core values of company
Interactive control systems
Formal info systems that managers use to focus company’s
Attention and learning on key strategic issues
4 levers of control
1 Boundary systems
2 Diagnostic control systems
3 belief systems
4 interactive control systems
What 2 financial measures of success do companies use in their balanced scorecards?
Return on investment
Residual income
What are 3 nonfinancial performance measures companies use on balanced scorecards?
1 Measures of nonfinancial performance from the customer
2 Internal business process
3 Learning and growth perspectives
How can managers increase ROI?
Increasing revenues, decreasing costs, decreasing
Investment
What is the drawback of managers using ROI?
May induce managers of highly profitable divisions to
Reject projects that are in firms best interest because
Divisional ROI is reduced
What are the 2 benefits of using residual income (RI)?
1 promote goal congruence
2 uses discounted cashflows for Longterm projects
Over what timeframe should companies measure performance?
Multi year period
What are alternative choices for calculating components of each performance measure?
1 Define investment
2 determine whether assets included in investment
calculations are measured at historical or current cost
3 whether Depreciable assets calculated at gross or
Net book value
How should companies tailor a budget 3 things?
1 to particular subunit
2 particular accounting system
3 particular performance measure
Timely feedback is critical to…
Enable managers to implement actions that correct
Deviations from target performance
How can companies compare performance of divisions operating in different countries?
Adjusting ROI and RI to inflation and exchange rate
Btw 2 countries
Comparing performance of divisions operating in different countries is difficult because of…
Legal, political, social, economic and currency differences
Why are managers compensated based on mic of salary and incentives?
Managers face risks because factors beyond their control
May affect their performance
Owners choose to mix of salary and incentive compensation
To trade off incentive benefit against cost of imposing risk
