Performance_Measures 1 Flashcards

1
Q

How is Residual Income calculated?

A

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.).

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2
Q

How is Return on Investment (ROI) calculated?

A

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

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3
Q

Benchmarking

A
  • 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.
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4
Q

Management by objectives

A
  • 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.
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5
Q

Management by exception

A

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.

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6
Q

Responsibility accounting

A

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.
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7
Q

Why was Balanced Scorecard created?

A
  • 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
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8
Q

What four perspectives are included in Balanced Scorecard?

A
  • 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
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9
Q

Static / Flexible Budget

A
  • 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.
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10
Q

Manufacturing Cycle Efficiency

A

Manufacturing Cycle Efficiency = Manufacturing or process time / Time from start of manufacturing to delivery

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11
Q

The difference between variable and absorption costing

A
  • Variable costing is sometimes called direct or marginal costing.
  • Absorption costing is sometimes referred to as full product costing.
  • 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.
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12
Q

Variance

A

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:

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13
Q

A material purchase price variance is computed

A

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.

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14
Q

Incentive compensation

A
  • 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.
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15
Q

Project manager’s activities

A

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.
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16
Q

Delphi method

A

To help identify risks, the project manager may perform brainstorming sessions. One example of brainstorming is the Delphi method, a technique for decision making and problem solving. The Delphi method attempts to develop a forecast through a group consensus. Individual experts are asked to respond to an initial questionnaire followed by a second one prepared using the information and opinions gathered through the first questionnaire. In this process, each expert is asked to reconsider and revise his or her initial answers to the various questions. This process continues until some type (or range) of consensus is reached.

17
Q

What is measured by Six Sigma?

A

It measures a product versus its quality goal.

Six Sigma is a methodological approach to eliminating defects with the goal to achieve six standard deviations from the desired target of quality (e.g., 3.4 defects per million).

18
Q

Business process management

A
  • Business process management includes approaches, techniques, and measures that support the organization design and administer and analyze the business process.
  • The business process needs to be analyzed throughout the lifetime of the organization, no matter what process.
  • These processes are put into place manually by knowledgeable personnel under strict control of the organization’s regulations and procedures.
19
Q

Lean Production or Lean Manufacturing

A

Lean Production or Lean Manufacturing is the set of “tools” that assist in the identification and elimination of waste to improve quality while reducing production costs.

20
Q

Quality control costs : 4 types

A

(1) Prevention costs (production process changes that reduce product defect rates)(2) Inspection costs (tests to make sure products meet quality standards)
(3) Internal failure costs (reworking or scrapping defective products)
(4) External failure costs (selling defective products, which results in product liability claims, warranty and repair expenses, loss of customer satisfaction, and damage to the company’s reputation)

21
Q

Business process re-engineering (BPR)

A
  • Business process re-engineering (BPR) is a systematic approach or methodology for analyzing business activities or processes with a view to improving the organization’s alignment with strategic goals and/or its effectiveness, efficiency, competitiveness, etc.
  • There are three questions that need to be answered to see if an organization is implementing BPR:
    • Is the effort focused on critical business processes that, if they are changed, can have a major impact on performance?
    • How ambitious is the desired improvement?
    • How receptive is senior management to change?
      *
22
Q

Shared services

A
  • Shared services is combining efforts of two departments that share the same resources.
  • Shared services means that the service is internal; it is the exact opposite of outsourcing. For example, two hospitals might decide to merge their HR functions.
23
Q

SWOT analysis

A

A strengths, weaknesses, opportunities, and threats (SWOT) analysis is a strategic plan formation that helps managers clarify the organization’s mission, leading to long-term objectives such as business diversification, addition or deletion of product lines, or penetration of new markets:

  • Strengths: These internal factors focus on areas where the company has a comparative advantage because of internally created resources. Examples are patents, copyrights, or highly trained people.
  • Weaknesses: These internal factors are the opposite of strengths. They represent areas where the company is weak or its competitors have comparative advantages over the company’s internally created resources.
  • Opportunities: These are external factors that involve matching the environment to the organization. The focus and attention is on critical issues and choices facing the enterprise. Opportunities can, and should, be prioritized.
  • Threats: External in nature, these factors can arise from a competitor or from changes in market demographics. Threats may also be the consequence of an adverse change in one of the company’s necessary inputs.
24
Q

Off-shore operations

A
  • “Off-shore operations” describes an organization incorporating outside of the original jurisdiction of the primary operations.
  • The organization will be considered off-shore if it:
    • incorporates under offshore company laws.
    • incorporates as a nonresident.
    • does not trade within the offshore jurisdiction.
    • meets nominal tax expenses.
25
Q

Value chain

A

Value chain includes any part of an entity that enhances the quality or usefulness of the product or service in the eyes of the customer.

26
Q

Throughput

A

Throughput is measured by using a series of designed tasks and measuring the amount of work done in a stated period. For example, a personal computer might be set up to save 30 documents of 50,000 characters each. The length of time required to perform that would be the throughput for the files saved. Similar tests can be run on printers, hard disks, communications, modems and other devices.

Throughput is the rate of production over a standard time and can be used as a cost driver to apply overhead.

Throughput costing is a kind of variable costing that assigns only direct material costs to products and treats all other production costs as period costs.

Throughput costing relegates all product costs except direct materials to period cost (expense) status. It is a newly proposed costing method.

27
Q

Just in time (JIT)

A
  • Just-in-time (JIT) is a manufacturing philosophy intended to promote the simplest, least costly means of production. Under ideal conditions, the company would receive raw materials just in time to go into production, manufacture parts just in time to be assembled into products, and complete products just in time to be shipped to customers. It eliminates the storage of inventories at all stages of the production process. If this happened with no change in other assets, then the percentage of inventory to total assets would decrease.
  • Just-in-time would reduce or eliminate inventories. Inventory turnover is the average number of times that inventory “turns over” or was sold during the period, and is found by dividing cost of goods sold by average inventory. If cost of goods sold is unchanged, but inventory decreases, then inventory turnover would increase.
  • The just-in-time (JIT) production environment is characterized by production generated by need. This is a “demand-pull” system in which sales occur first and trigger the production of units. Typical features of a JIT system include small lot sizes, low setup times/costs, and balanced workloads.
  • Lean manufacturing is another term for just-in-time (JIT) production system.
  • Company that adopts a just-in-time purchasing system to reduce the number of suppliers to those few who will guarantee the needed quality and timeliness of delivery.
28
Q

The drum-buffer-rope system

A

The drum-buffer-rope system is a tool for managing product flow, inspired by the theory of constraints (TOC). The system focuses on maximizing throughput around the constraint as follows:

a. Drum: The constraint in the system sets the pace (i.e., the “drum”) for production. Production cannot exceed the slowest path through the system.
b. Buffer: Protective inventory is built into the system to provide slack around the constraint. Unlike JIT (just-in-time production), in which desirable inventory is zero, TOC builds an allowance for problems into the system. Such problems might include last-minute customer orders, delays in vendor shipments, employee absenteeism, and equipment failure. An inventory buffer is needed to reduce risks to throughput.
c. Rope: a “pull” system such as Kanban to trigger product flow.