Performance management: Performance measures

Question 1

How do you calculate ROI ?

Answer 1

[Controllable divisional profit / Controllable divisional investment] x 100

Question 2

What are the three characteristics of ROI ?

Answer 2

1. Purpose - how much profit earned compared to capital invested in center.
2. Centrally-controlled assets.
3. Decision rule.

Question 3

What are the advantages of ROI ?

CRISP - ROI keeps performance management sharp and efficient!

Answer 3

Comparisons.
Recognized & widely used.
Insightful breakdown - deeper analysis.
Smart use of capital resources.
Profitability boost through reducing capital employed.

Question 4

What are the disadvantages of ROI ?

DIP - ROI can cause a dip in LT performance by focusing on wrong things.

Answer 4

1. Discourages beneficial investment.
2. Inefficient asset use.
3. Promotes short-term focus

Question 5

How do you calculate RI ?

Answer 5

Controllable divisional profit - (R x controllable divisional investment)

Question 6

What are the 2 characteristics of RI ?

Answer 6

1. Measures divisional profit earned after covering its cost of capital.
2. Decision rule:
   RI > 0

Question 7

What are the advantages of RI ?

CORE - RI focuses on core essentials of value creation.

Answer 7

Cost of finance.
O - Easy decision rule.
Reduces dysfunctional behavior.
E - Risk & Cost of capitals.

Question 8

What are the disadvantages of RI ?

MADAD - If not handled RI can go a bit Mad!

Answer 8

Manipulation.
Absolute figures.
Dysfunctional behavior.
Appropriate cost of capital.
Different accounting policies.