Kế toán, kiểm toán - Chapter 11: Investment center performance evaluation

1Investment Center Performance EvaluationCHAPTER 11Managerial Accounting 11E Maher/Stickney/WeilPowerPoint Presentation by LuAnn BeanProfessor of AccountingFlorida Institute of Technology© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2CHAPTER GOALChapter 11 discusses concepts and methods for measuring performance and controlling activities in multidivisional companies that have both manufacturing and non-manufacturing divisions.☼☼3DIVISION: DefinitionIs a segment that conducts both production and marketing activities.LO 14DIVISIONSA division may be a profit center, responsible for revenues and operating costs.A division may also be an investment center, responsible for assets in addition to revenues and operating costs.LO 15ADVANTAGES OF DECENTRALIZATIONMajor advantages of decentralization (authority and responsibility are delegated from top management) include:Enabling local personnel to respond quickly to a changing environment.Freeing top management from detailed operating decisions.Dividing large, complex problems into manageable pieces.Training managers and providing a basis for evaluating their decision-making performance.Motivating ambitious managers.LO 16DISADVANTAGES OF DECENTRALIZATIONMajor disadvantages of decentralization include:Local managers do not act to achieve the overall goals of the organization.Possible conflicts between goals of a division and those of the organization.LO 17PERFORMANCE EVALUATIONSTop management should distinguish between an organizational division and the division manager. Many measures used to evaluate divisions can/should be adjusted to account for revenues, costs, and investments that are controllable by its manager.LO 18RETURN ON INVESTMENT (ROI): DefinitionIs a method of evaluating performance based on assets invested.ROI = Division operating profit ÷ Division Investment LO 29QUESTIONS FOR ROIBefore applying ROI, managers must find answers to several questions:How does the firm measure revenues?Which costs does the firm deduct in measuring divisional operating costs?How does the firm measure investment?LO 210TRANSFER PRICE: DefinitionIs the value assigned to goods or services transferred from one unit to another within the organization.LO 311SETTING TRANSFER PRICESManagement must consider congruence with organizational goals when setting transfer prices. Methods of setting transfer prices include:Top management intervenes to set pricesTop management establishes policies for setting transfer pricesDivision managers negotiate their own transfer pricesLO 412TRANSFER PRICING POLICIES 1Management has several choices for transfer pricing policiesMarket-price basedBest in competitive market Only if market prices are readily availableLO 413TRANSFER PRICING POLICIES 2Management has several choices for transfer pricing policiesTransfer prices based on costFull-absorption costsOnly if differential or variable costs are availableActivity-based costingCost-plus pricingStandard costs or actual costsLO 414TRANSFER PRICING POLICIES 3Management has several choices for transfer pricing policiesOther motivational aspectsDual pricingProvides selling division with profit but charges buying division with costs onlyOther incentivesBalanced scorecardBasing part of supplying manager’s bonus on purchasing center’s profitsLO 415NEGOTIATED PRICESThere are advantages and disadvantages to having managers negotiate transfer prices.Advantage: preserves autonomy of division managersDisadvantages Consumes management timeMay depend on manager’s negotiating abilityLO 416The economic transfer pricing rule tomaximize Company profits is toTransfer at the differential outlay cost to theselling division (VC), + opportunity costof making internal transfers ($0 withidle capacity; selling price – VC with no idle capacity)LO 4DECISION RULE17DIRECT and INDIRECT COSTS: DefinitionRefers to whether cost associates directly with the division.LO 518CONTROLLABLE and NON-CONTROLLABLE: DefinitionRefers to whether the division manager can affect the cost.LO 519DIRECT and INDIRECT COSTSManagers should be held responsible for direct costs (any cost necessary to operate). They are always deducted for performance evaluation of a division whereas manager evaluation should only include direct costs that are controllable. Similarly, divisions can partially control indirect controllable costs. LO 520ROI COMPONENTSManagement must decide (a) which assets to include in the investment base and (b) what valuation to use for those assets. Problems occur when assets are shared among divisions or when considering centralized services. Valuation may be net or gross book value.LO 621PROFIT MARGINLO 8ROI = Profit Margin Divisional Revenues XDivisional RevenuesDivisional InvestmentPROFIT MARGIN PERCENTAGEINVESTMENT TURNOVERRATIO22PROFIT MARGIN PERCENTAGE: DefinitionIndicates the portion of each dollar of revenue that is profit.LO 823INVESTMENT TURNOVER RATIO: DefinitionIs the ratio of divisional sales to investment in divisional assets; a measure of the effective use of invested funds.LO 824MINIMUM ROIManagement must set a standard or desired ROI rate for each period and a minimum ROI for each division.LO 825ECONOMIC VALUE ADDED (EVA): DefinitionIs the amount of earnings generated above the cost of funds invested to generate those earnings.LO 926EVALO 9EVA = Net operating profit after tax - (Weighted-average cost of capital X Investment) Where Investment is (Total Assets – Noninterest-bearing current liabilities)27Adjusting GAAP data for incentive plansThe main adjustments made to GAAP data for incentive plans include:Capitalize/amortize R & D expenditures and customer development, advertising, promotion expendituresCapitalize/amortize employee training expendituresMake price-level adjustmentsUse market values of assets to assess value declinesRestate inventories at replacement cost.Do not amortize goodwill.LO 928End of CHAPTER 11