Performance management 2.0

Question 1

How is RI calculated when given Divisional contribution?

Answer 1

RI = Profit - [ R x All assets ]
Profit = Contribution - Fixed costs
All assets = NCA + CA

Question 2

What method can be used for evaluating criteria of ROI and RI when deciding to accept a project ?

Answer 2

Step 1 - Find Current ROI
Step 2 - Find Project ROI:
Increase in profit / Investment x 100
Find Project RI:
Increase in profit - ( R x Investment)
Step 3 - Decision rules:
Current ROI < Project ROI, ACCEPT
Current ROI > Project ROI, REJECT
RI > 0, ACCEPT
RI < 0, REJECT

Question 3

How is Controllable RI calculated when given:
NCA
Inventory
Receivables
Payables

Answer 3

Controllable RI
= Controllable profit - ( R x Controllable capital )
Where,
Controllable capital = NCA + INV

Divison has complete control over inventory and NCA but not receivables and payables !

Question 4

What is the general proforma of a Flexed budget ?

Answer 4

Materials
Labor
Production overheads:
Variable
Fixed
Other overheads (non-production)
Total cost

All multiplied by the activity level except for fixed costs and other oveheads.

Question 5

What method can be used to calculate Flexed budgets ?

Answer 5

Step 1 - Find variable cost per 1% of activity.
Step 2 - Use production costs in the HL method to find variable cost per unit and fixed costs:
Increase in cost / Increase in activity.
Step 3 - Substitute back into general proforma, multiplying by activity level.

TIP: Don’t use %, e.g. use 80 not 80%

Question 6

How do you calculate revised ROI after the sale of a NCA ?

Answer 6

(1) Calculate revised profit =
Original profit + Profit from sale.
(2) Calculate revised investment =
Original investment
Cash from sale
(Carrying amount of NCA sold)
(3) Calculate Revised ROI.