leading indicatorsmeasures that identify future nonfinancial and financial outcomes to guide management decision makingprofit centershort term decisions
can contain a revenue and profit center
evaluated on both revenue drivers and cost controlinvestment centersLT and ST decisions
contains cost centers under it
evaluated on ROI, residual income, and economic value addedcost centerno revenue associated with it
evaluated on cost control (discretionary or engineered)revenue centerevaluated on revenue driverswhat are the 3 strategic issues with implementing cost centerscost shifting
excessive ST focus
budget slackwhat is cost shiftingmanagers replace controllable cost with non-controllable costs
variable to fixedwhat are the two types of cost center methodsdiscretionary cost
engineered costdiscretionary costinput oriented
good when costs are predominately fixed
outputs are poorly defined
the focus is on planningengineered cost methodoutput oriented
good when costs are predominately variable and controllable
outputs are well defined
focus is on evaluationwhat are the strategic role of profit centerscoordination and motivationvariable costingnot GAAP
only includes variable costs in determining cost of goods soldfull costing or absorption costingincludes fixed and variable production cost in COGSdifference between variable and full costingchange in inventory x fixed manufacturing cost per unitreturn on investmentprofit/average assetsdupont ROIReturn on Sales * Asset Turnover
return on sales = profit/sales
asset turnover = sales/average assetswhat are the measurement issues with ROIconsistency and fairnesswhat assets should you include in the ROI calculatedlong lived assets that are traceable to a business unit
long term leases
idle assetsadvantages with ROIaccounts for cost of capital
easy comparisondisadvantages of ROIshort term
easy to manipulate
rejection of profitable projects
underinvestment problem
less useful in the knowledge economyresidual income equationinvestment centers profits - ( Investment center's invested capital x required rate of return )what is required rate of return usually equal tothe cost of capitalwhat does residual income mitigatethe under-investment problemwhat are advantages of residual incoemmitigates the underinvestment problem
motivates managers to focus on profitable investments, increase sales, and decrease costswhat are some disadvantages of residual incomehard to compare between units of different sizes
short term focus
motivates earnings managementtime period and trend analysismitigates short term behavioral problems associated with ROI
helps with goal congruenceeconomic value added formualsales- op exp (with tax) - financing expense
financing exp - cost of capital x amount of invested capitalwhat is the difference between RI and EVARI is calculated using GAAP whereas EVA uses economic earnings
- uses WACC
- includes non-GAAP intangibles in the calculationwhat are the primary objectives of transfer pricing- motivate effort on the part of the business unit managers
- achieve goal congruence
- reward business unit managers for effort and skillwhat are the 4 transfer pricing methodsvariable cost method
full cost method
market price
negotiated pricevariable cost transfer pricing methodtransfer price = variable cost + markup
best when seller has capacity and variable cost is less than external purchase price
encourages buying internallyfull cost transfer pricing methodtransfer price = sellers variable cost + allocated share of fixed costs + markup
advantages: this is well understood and information is readily available
disadvantage: including fixed costs can lead to improper decisionsmarket price transfer pricingset as the current external price
advantage: objective
disadvantage: not readily available for some productsnegotiated transfer price methodnegotiated between divisions to determine transfer price
advantage: consistent with decentralization
disadvantage: costly and more time consuming
