performance meausurement
Click the card to flip 👆
1 / 44
Terms in this set (44)
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