Chapter 11 Performance Measurement In Decentralized Org Flashcards
Net operating income?
Income before interest and taxes. Aka EBIT
Return on investment formula?
ROI = net operating income/average operating assets
Operating assets?
Cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes
Average of operating assets?
Add beginning to ending assets and divide by two
Another formula for ROI?
ROI = margin x turnover
Margin?
Margin = net operating income/sales.
Tells how much of every sales dollar can be kept as net operating income.
Turnover?
Turnover = sales/average operating assets
Residual income?
Income earned above the minimum required return on its operating assets.
Formula for residual income?
= net op income - (average op assets x min required rate of return)
Decentralized organization?
Decision-making authority is spread throughout the org rather than confined to top executives
Advantages of decentralization? (5)
- Top management can focus on larger issues
- Low-level management have the most info on day to day ops
- Orgs can respond more quickly to customers and changes
- Helps train low level management for higher positions
- Increases lower level managers motivation and job satisfaction
Disadvantages of decentralization? (3)
- Low level managers may make decisions without understanding the company’s overall strategy
- Coordination may be lacking if low level managers don’t decide together
- Low level managers objectives may clash with orgs objectives
Does responsibility accounting link lower level managers to the outcomes of their decisions?
Yes
Responsibility center?
Used for any part of an org whose manager has control over and is accountable for cost, profit, or investments
Cost center?
Managers here have control over both costs and revenue
Profit center?
Managers control costs and revenues
Investment center?
Manager controls cost, revenue, and investments
- responsible for earning an adequate return on investment
How to increase margin?
Reduce costs.
How can increase turnover? (3)
Reduce average op assets, increase net op income, increase sales
What happens when use net book value of depreciable assets to calculate average op assets?
Net book value decreases over time as accumulated depreciation increases
- decreases denominator in the ROI formula so increases ROI
What happens when use Gross cost of the asset?
Ignores accumulated depreciation.
Stays constant over time.
Economic value added?
An adaptation of residual income adopted by many companies
Delivery cycle time?
Amount of time from when a customer order is received to when the completed order is shipped
Formula for delivery cycle time?
= wait time + throughput time
Throughput time?
Amount of time required to turn raw materials into completed products. Aka mfg cycle time
The four parts of throughput time?
Process - amount of time work is done
Inspection - ensuring not defective
Move - from station to station
Queue - time spent waiting
Formula for throughput time?
= process + inspection + move + queue
Manufacturing cycle efficiency formula?
Value added time/throughput time
AKA process time/throughput time
What is a balanced scorecard?
Integrated set of performance measures that are derived from and support a co’s strategy
- translate strategy into performance measures employees can understand and influence
4 sections of performance measures?
Financial
Customer
Internal business processes
Learning and growth
Balanced scorecard relies on financial as well as non-financial measures?
Yes
How are the performance measures linked together?
Cause and effect basis
Should incentive compensation be linked to balanced scorecard measures?
Yes
