Week 11 Flashcards
What is Responsibility Accounting?
It measures performance based on individuals or departments, aligning their goals with organizational objectives. It uses performance targets and reward systems to encourage goal congruence.
What makes a good performance measure?
A good measure aligns with company goals (goal congruence), holds managers accountable for controllable factors, and balances long- and short-term objectives.
What are Controllable Profit Statements used for?
These statements assess manager performance by considering only costs and revenues within the manager’s control, focusing on controllable profit.
Define Return on Investment (ROI) and its formula.
ROI is a profitability measure indicating efficient resource use. Formula: ROI = Profit / Invested Capital.
List two advantages of using ROI.
(1) Encourages profit maximization using available capital,
(2) Enhances responsibility and team effort through comparable measures among divisions.
Name two disadvantages of using ROI.
(1) Asset valuation issues,
(2) Potential short-term focus, neglecting long-term benefits like R&D and managerial development.
Define Residual Income (RI) and its formula.
RI measures returns exceeding the minimum required. Formula: RI = Net Operating Income - (Minimum Required Return × Invested Capital).
List one advantage and one limitation of using RI.
Advantage: Encourages goal congruence by aligning manager and organizational interests.
Limitation: Biased toward larger divisions and may encourage short-term focus.
What is Economic Value Added (EVA)?
EVA measures value creation by deducting the cost of capital from after-tax operating income, encouraging efficient capital use.
Formula; NOPAT - (TA - CL) x WACC
List one advantage and one limitation of using EVA.
Advantage: Reduces transfer pricing issues by using market prices.
Limitation: Requires adjustments to financial data, which can be time-consuming and complex.
