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Managerial Accounting > Week 3- Performance evaluation and measurement systems > Flashcards

Week 3- Performance evaluation and measurement systems Flashcards

1
Q

what is decentralisation?

A

the delegation of decision making due to growth of business

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2
Q

what are the advantages of decentralisation?

A
  • Allows quicker response to events
  • frees top management from day to day activities
  • Uses specialized knowledge and skills of managers
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3
Q

what are the disadvantages of decentralisation?

A

-Goal congruenece: challenging for top managers to monitor that lower mangers are making decisons that acheive the top management goals

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4
Q

What is responsibility accounting?

A

Used to measure the performance of people and departments to foster goal congruence

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5
Q

what is a responsibility centre?

A

a subunit within a business whose manager is held accountable for specified financial results ( a unit that has been delegated decison making)

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6
Q

What re the four types of responsibilty centre?

A

1) Cost centre
2) Revenue centre
3) Profit centre
4) investment centre

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7
Q

what does a cost centre have control over?

A

cost

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8
Q

what does a profit centre have control over?

A

Both costs and revenues

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9
Q

What does a investement centre have control over?

A

Profits and invested capital

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10
Q

how is an investment centers performance measured?

A

Profit is compared with the assets employed in earning it

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11
Q

what are the conditions for delegating responsibility?

A
  • The lower manager should have access to the relevant information needed for making decision making
  • There should be ways to measure the effectiveness of the tradeoffs the manager has made
  • Important to have a good performance measurement system to evaluate the effectiveness of the manager
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12
Q

what are the advantages of profit centres?

A
  • the quality of the decision may improve if the manager making it has enough knowledge to make them
  • Provides a training ground for managers
  • Profit conciousness is enhanced- will focus on maximising profit
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13
Q

what are the disadvantages of profit centres?

A
  • Loss of control
  • Lack of competent managers will lead to reduced profit
  • Too much emphasis on short run profitability- maangers may decide to cut down costs such as R+D that generate costs in the long run
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14
Q

what is the investment base?

A

The sum of the assets in an investment centre. allows them to generate the profit

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15
Q

how are financial performance measures usually used?

A

Usually used at the top of the hierachy - eg. have they met the sales target for the quarter

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16
Q

where are operational performance measures usually used?

A

Lower levels of the firm eg. volume sold, lead times, quality of product

17
Q

what is the disadvantage of using share price to measure performance?

A

Other factors affect share price, not just employee performance

18
Q

what re the two primary ways of evaluating the performance of an investment centre?

A

Return on investment and residual income

19
Q

what is the calculation to work out return on investment?

A

Income/ invested capital

20
Q

If ROI is < mean ROI for the business then what will the managers do?

A

Reject the project

21
Q

what is underinvestment in terms of ROI?

A

When the ROI for a project is lower that the mean business ROI but higher than the Cost of capital (coc). Managers should accept the investment

22
Q

what is overinvestment in terms of ROI?

A

When the ROI is higher than the mean ROI but lower than the cost of capital. this is when the manger is incentivised to accept the investment but shouldnt

23
Q

what are other disadvantages of using ROI?

A

-Income does not include value increases
-Total assets exclude intangible assets
-ROI also provides incentives for managers to keep old assets in the books
Makes firms with old assets look like they have superior performance

24
Q

what re the three main ways of improving ROI?

A

1) increase sales price
2) Decrease expenses
3) Lower invested capital- although this may not benefit the manager in the long run if the manager is cutting long term perofitability projects eg. R+D

25
Q

what is a performance report?

A

They show the budgeted and actual revenues and costs and the difference in between (the variance). Show whether the subunit is doing better than predicted or worse

26
Q

how do you calculate RI (residual income)?

A

Operating profit- capital charge (investment base *cost of capital)

27
Q

when RI is > 0 what will business subunits do?

A

accept the project

28
Q

what is the advantage of RI over ROI?

A

It aids sound investment decision making by fostering goal congruent decisions by aligning shareholders wealth with managers targets

29
Q

what is the best way of measuring performance of investment centers?

A

Economic value added (EVA)

30
Q

what is the difference between ROI, RI and EVA?

A

ROI and RI use book values but EVA uses adjusted figures to make the numbers reflect the business more accurately

31
Q

how do you calculate EVA?

A

Adjusted net operating profits after taxes - (cost of capital * adjusted assets employed)

32
Q

what are the factors that influence which adjustment will be made in EVA?

A

Magnitude of change
Data availiability
Easiness of communicating the required changes to managers
The effect of the changes on decisions

33
Q

what are the advantages of EVA?

A
  • Aligns Decisions with shareholder wealth
  • Overcomes multiple and inconsistent goals because as managers are maximising EVA they are also increasing shareholder wealth. Therefore it is much more than a performance measurement tool.
  • the most accurate measurement tool of performance because it uses adjusted figures
34
Q

why is it important for managers to have control over the financial are they are being measured against?

A

The financial performance measures wont reflect the actions of the manager

Managerial Accounting (10 decks)

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