Performance_Measures 1 Flashcards
How is Residual Income calculated?
Residual Income = Net Operating Income (EBIT) - (Required Rate of Return x Invested Capital)
It is often used as a measure of performance of an investment center in responsibility accounting, and rates performance in terms of dollars rather than a percentage (rate of return).
Residual Income utilizes some imputed costs (imputed costs reflect what something should or would cost, but they are not recorded in accounts because they are not actual expenditures of cash or other resources.).
How is Return on Investment (ROI) calculated?
Return on investment is the ratio of a measure of “return” divided by a measure of “investment.” There are various ways to measure ROI including: return on assets (ROA) , return on net assets (RONA) and return on equity (ROE) .
ROI is most often computed using net income (income after interest and taxes) but it also may be computed using operating income or operating income after taxes.
ROI = Net income/Total assets
ROI = Return / Investment or Capital
ROI = (Net income/sales) x (Sales/Average investment or Capital)
ROI = Return on sales x Asset turnover ratio or Capital turnover
Although ROI is expressed as a percentage, this fact is not a disadvantage. But ROI may lead to rejecting projects that yield positive cash flows.
Example: You Invest $100 to buy a machine that generates $60 in Operating Income $60 / $100 : 60% ROI
Benchmarking
- Benchmarking involves identifying “best in class” performance or other measure(s), then comparing the company’s performance to that benchmark or standard.
- Companies strive for continuous improvement. One of the tools available to managers to help them to institute improvements within their organization is benchmarking. Benchmarking is the study of leading companies in the industry or companies that excel in various tasks. A company’s management can strive toward improved performance by comparing and contrasting their performance to the performance of a “benchmark” organization.
Management by objectives
- In management by objectives (MBO), employee(s) and superior(s) jointly determine the goals and plans for achieving a unit’s objectives.
- The performance of the individuals is measured against these goals and plans.
- The purpose is to focus on the definition and attainment of both overall and individual goals with participation at all levels of management.
Management by exception
Management by exception is a technique by which management disregards minor variations and focuses attention on those processes identified by exception reporting such as variance analysis that are deviating significantly from the norm or expectations.
Responsibility accounting
Responsibility accounting allocates those revenues and/or assets which a manager can control to that manager’s responsibility center and holds the manager accountable for operating results.
- If a manager is only responsible for costs, his/her area of responsibility is called a cost center. Cost centers represent the most basic activities or responsibilities. Nonrevenue generating departments (purchasing and billing, for example) are usually organized as cost centers.
- If the manager is responsible for both revenues and costs, his/her area of responsibility is called a profit center.
- i_f the manager is responsible for revenues, costs, and asset investmen_t, his/her area of responsibility is called an investment center.
Why was Balanced Scorecard created?
- The balanced scorecard, a performance measurement system that includes financial and nonfinancial performance measures, was developed by Kaplan and Norton.
- These performance measures are generally in four primary perspectives: financial, customer, internal business processes, and learning and growth
What four perspectives are included in Balanced Scorecard?
- Financial perspective: focuses on return on investment and economic value added
- Customer perspective: focuses on satisfaction, retention, market, and account share
- Internal business processes perspective: focuses on quality, response time, cost, and new product introductions
- Learning and Growth perspective: focuses on employee satisfaction and information system availability
Static / Flexible Budget
- A static budget is prepared for a single target level of activity. A static budget does not change, although actual or possible levels of activity might vary. Static budgets are often very detailed; master budgets are usually prepared as static budgets. A static budget contrasts with a Flexible Budget.
- While flexible budgets are easily modified for different activity levels, they usually do not present as much detail as a static budget. Flexible budgets may be prepared retroactively for actual levels of activity achieved or prospectively for possible potential levels of activity.
Manufacturing Cycle Efficiency
Manufacturing Cycle Efficiency = Manufacturing or process time / Time from start of manufacturing to delivery
The difference between variable and absorption costing
- Variable costing is sometimes called direct or marginal costing.
- Absorption costing is sometimes referred to as full product costing.
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The difference between variable and absorption costing is the way fixed overhead costs are handled.
- Under variable costing, they are charged to expense as a period cost in the period incurred. No fixed overhead costs are allocated to the units produced.
- Absorption costing treats fixed costs as a product cost and allocates them to the units produced. Fixed costs follow the units through work-in-process and finished goods inventory, and are expensed through cost of goods sold when the units are sold.
Variance
Variance is the deviation of actual results from planned or expected results. It is the difference between planned and actual values. Variance is measured for both quantity (usage or efficiency) and cost (price or rate) and is used to evaluate performance—the goal is for variances to be zero or favorable. Variance is usually expressed in dollars (i.e., quantities are multiplied by prices).
Variances are assigned to the appropriate responsibility center (department), which can control the rate or usage. This allows for appropriate performance evaluation.
Variances may be summarized as follows:
A material purchase price variance is computed
A material purchase price variance is computed:
MPPV = Quantity Purchased × Difference between actual and standard price
If this variance is favorable, the actual material price must have been less than the standard material price.
Incentive compensation
- Incentive compensation is compensation for meeting or exceeding certain company goals. Some examples include bonuses paid for meeting earnings or customer satisfaction goals, or stock-based compensation that pays more when stock price increases.
- Incentive compensation programs should promote and maintain an inspired and productive work environment.
- Incentive compensation is based on improving the company and that is accomplished by encouraging employees to do well for the company.
Project manager’s activities
The project manager’s activities include, but are not limited to:
- planning the project,
- developing schedules,
- defining the scope,
- risk analysis and management,
- quality control, and
- cost management.