Chapter 11 Flashcards
Three Topics That Help Us Make Decisions
- ROI
- MCE
- Balanced Scorecard
Cost Centers
can control costs only and are evaluated by performance report standards
Profit Centers
can control costs and revenues…. are evaluated by contribution and segment margins
Investment Centers
can control,revenues, and assets
are evaluated by ROI and Residual Income
ROI Formula
Average Operating Assets
Residual Income Formula
Actual Net Operating Income
-(minimum required rate of return x average operating assets)
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Residual Income
How is NOI different from NI?
NOi=Earnings before taxes and interest
Rules for Measuring Performance #1(ROI)
IF return on the new project> Current ROI
Accept the Project
Residual Income
If the RI is positive= accept project because you are earning more than the minimum required ( in other words accept if ROI> min required).
What is residual income also called?
Economic Value Added
How can the residual income be restated in terms of ratios?
Current ROI ratio- minimum required ratio= residual income ratio
MCE formula
Throughput Time
What can MCE not be greater than?
cannot be greater than 1.00
The lower the MCE…..
the less time spent adding value to the product
Balanced Scorecard Components
- Financial
- Customer
- Internal Processes
- Learning and Growth
What are the balanced scorecard components also known as?
KPI= key performance indicators
Newer Areas of Concern
1) Safety of Employees
2) going green initiative- sustainability \
3) Social Responsibility
Possible Areas To Track Part 1
- customer satisfaction as measure by a survey
- number of customer complaints
- market share
- product returns as percentage of sales
- amount of time to answer the phone
Possible Area to Track Part 2
- On time deliveries as percentage of all deliveries
- time to correct a customer complaint
- suggestions per employee
- employee turnover
- hours of in house training fro employees
ROI Formula #2
Margin x Turnover
Sub optimization
: May hurt the company as a whole by rejecting the new project that has a lower ROI than the division’s ROI but higher than the company’s ROI
If Residual income is positive……
If the RI is positive ⇒ accept project because you are earning more than the minimum required (in other words accept if ROI > min. required).
Problem with Residual Income
Problem: With residual income (RI) cannot compare projects of 2 different sizes or dollar amounts – unless you compare using ratios.
Formula for Residual Income Ratio
Current ROI ratio – minimum required ratio
NOI vs NI
NOI (net operating income) is different from Net income. NOI = EBIT (Earnings before taxes & interest). You can calculate by starting with NI + taxes + interest
What adds value in MCE?
process time
What is non value added time in MCE?
- wait time
- inspection time
- move time
- queue time
Balanced Scorecard
An integrated set of performance measures that are derived from and support the organization’s strategy. It typically is divided into 4 performance measures.
what are the balance scorecard components also know as?
KPI(key performance indicators)
Newer Areas of Concern
Newer areas of concern:
1) Safety of employees
2) “going green” initiatives Sustainability
3) Social responsibility
What is GRI?
Global Reporting Initiative
