Performance Management System Flashcards
What is a ‘Cost Centre’?
A cost centre is a function, or segment of the business that is in charge only of expenses. For example a purchasing manager, or IT staff within an organisation.
What is a ‘Profit Centre’?
A profit centre is a function or segment of the business that has responsibility for both revenues and expenses. A store manager, or a partner of an accounting firm would be in charge of profit centres.
When evaluating a Profit Centre’s performance you may prepare a Segmented Profit & Loss statement. How do you calculate a segment margin?
The segment margin is calculated as Contribution Margin – Traceable Fixed Costs for the segment.
How does calculating a segment margin help managers?
A segment margin allows managers to consider the longer term ramifications of decision making for a segment. It considers the need for a segment to be able to earn enough revenue to cover both variable costs and traceable fixed costs.
What is ‘Residual Income’?
Residual income is the actual income earned that is higher than the expected income from an investment. Expected income is the amount of money invested in a project multiplied by the expected rate of return (also called Cost of Capital).
Why do companies pay managers with stock and option grants? What are the benefits and disadvantages of this kind of pay?
- Stock payments align managers interests with shareholders.
- Option grants give managers a higher pay out when they are successful in increasing the value of their company’s share price.
- The disadvantage managers may try to manipulate the share price for their own short term gain.
- They may engage in earnings management, or other poor behavior as they are self-interested in making the company look like it is performing better than it actually is.
what is expected income
Expected income is the amount of money invested in a project, multiplied by the expected rate of return (also called Cost of Capital).
