Management Accounting Module 5: Performance Management

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Management Accounting Module 5: Performance Management
2013-06-16 11:07:53
Performance Management

Notes for module 6
Show Answers:

  1. What is ROI (Return on Investment)?
    Measures ability to generate return on invested capital
  2. How do you calculate ROI?
    ROI = Operating Income/Total average assets

    • Where:
    • Operating Income = EBIT
  3. Other way to calculate ROI?
    ROI = Margin X Turnover

    • Where:
    • Margin = Operating Income/Sales
    • Turnover = Sales/Average Total Assets
  4. Advantages of ROI
    • 1. Discourages excessive investment in assets
    • 2. Easy to calculate
    • 3. Focuses on revenue, costs and assets
  5. Disadvantages of ROI
    • 1. Discourages investment in projects with a return lower than current ROI – investments with a return higher than cost of capital may be forgone
    • 2. Short term focus
  6. What is Economic Value Added (EVA)?
    After tax operating income less cost of capital employed
  7. What is the EVA formula?
    EVA=After-tax operating income - (Weighted Average Cost of Capital X Total Capital employed)
  8. WACC

    • Where:Re = cost of equity
    • Rd = cost of debt
    • E = market value of the firm's equity
    • D = market value of the firm's debt
    • V = E + D
    • E/V = percentage of financing that is equity
    • D/V = percentage of financing that is debt
    • Tc = corporate tax rate
  9. What are the advantages of EVA?
    • 1. Focuses managers on return generated by investment/assets and encourages disposal of non-performing assets
    • 2. Positive investment opportunities encouraged, since return > WACC.
    • 3. Takes financial structure into account - FULLER PICTURE
  10. What are the disadvantages of EVA?
    • Subjectivity in calculations
    • WACC estimates for return on equity
    • Subjectivity in profit figures
    • Still a single measure of performance
  11. What is absorption costing?
    System that assigns all manufacturing costs to each unit of product
  12. What costs are used in absorption costing?
    Direct Materials, Direct Labour, Variable Overhead and a share of Fixed Overhead
  13. Absorption-Costing Income Statement
    • Sales
    • Less: Cost of Goods Sold
    •      Gross Profit
    • Less:
    •      Other Fixed and Variable expenses
  14. What is variable costing?
    System that assigns only unit-level variable manufacturing costs to the product
  15. Whats costs are used in variable costing?
    Direct Materials, Direct Labour, Variable Overhead
  16. What about Fixed Overhead in variable costing?
    It is treated as a period cost and not inventoried with other product costs. It's expensed in the period incurred.
  17. Variable-Costing Income Statement
    • Sales
    • Less: Variable Cost of Goods Sold
    •         Other Variable expenses
    •      Contribution Margin
    • Less: Fixed Overhead
    •         Other Fixed expenses
  18. What is Transfer Pricing?
    The selling price for the transfer of products/services between divisions of an organisation
  19. What does Transfer Pricing affect?
    • Affects revenues of transferring division
    • Affects costs of receiving division
    • ROI and managerial performance of both organisations
  20. What are the four methods of Transfer Pricing
    • 1. Opportunity costs
    • 2. Market Price
    • 3. Negotiated Transfer Price
    • 4. Cost-based Transfer Price
  21. Opportunity Cost
    • Identifies:
    • Minimum transfer price selling division would accept; AND

    maximum price buying division is willing to pay
  22. Market Prices
    If there is an outside market for the good and perfectly competitive, the transfer price is the market price
  23. Cost-based transfer pricing
    • Full-cost pricing
    • Selling price = producers full cost
    • No incentive for producer to be efficient as any cost increase is passed to customer

    • Full-cost plus mark-up
    • Mark-up adds a reward for poor cost control - increased cost will lead to a higher dollar mark up

    • Variable cost plus fixed fee
    • Variable costs recovered plus fixed fee towards fixed costs - fixed fee provides incentive for seller to take part
  24. Balanced Scorecard
    System that translates organisational strategy into performance measures
  25. Four perspectives of Balanced Scorecard
    • 1. Financial perspective
    • 2. Customer perspective
    • 3. Process (Internal business process) perspective
    • 4. Learning and Growth (Infrastructure) perspective
  26. What are the differing measures of Balanced Scorecard
    • 1. Lead/Lag measures
    • 2. Objective/Subjective measures
    • 3. Financial/Non-Financial measures
    • 4. External/Internal measures
  27. Financial Perspective
    • Establishes long- and short-term financial performance objectives expected from organisations's strategy.
    • Describes economic consequences of actions taken in other three perspectives

    • 3 strategic themes:
    • - Revenue Growth
    • - Cost Reduction
    • - Asset Utilisation
  28. Customer Perspective
    Defines customer and market segments in which business competes & describe way value is created for customers
  29. Customer Perspective
    - Core objectives
    - Customer Value
    • Core Objectives include:
    • - increase market share
    • - increase customer retention
    • - increase customer acquisition
    • - increase customer satisfaction

    • Customer Value
    • - difference between what customer receives (realisation) and what is given up (sacrifice)
  30. Internal Business Process (Process) perspective
    Describes internal processes needed to provide value for customers and owners

    • Three processes
    • - Innovation process
    • - Operations process
    • post-sales service process
  31. Innovation Process
    Anticipates emerging and potential needs of customers and creating new products/services to satisfy those needs

    • - increase number of new products
    • - decrease time in creating new products
  32. Operations Process
    Produces and delivers existing products/services to customers

    • - increase process quality
    • - increase process efficiency
    • - decrease process time
  33. Decrease process time
    - Standard cost per minute
    - Manufacturing Cycle Efficiency
    • Standard cost per minute:
    • Cell conversion costs/Minutes available

    • Manufacturing Cycle Efficiency (MCE)
    • Processing Time/(Process time + Move time + Inspection time + Waiting Time + Other non-value added time)
  34. Post-sales service process
    Provides critical and responsive services to customers after the product/service has been provided

    • Three areas
    • - Improve Employee capability
    • - Increase Motivation, Empowerment and Alignment
  35. Advantages of Balanced Scorecard
    • - Provides a variety of views regarding performance
    • - Multiple measures hard to manipulate
    • - Provides measures related to organisation strategy
    • - Better alignment with performance and strategy
  36. Disadvantages of Balanced Scorecard
    • - Hard to interpret as you can have good performances for some and bad performances for others
    • - Too many measures
    • - Can become too operational focused > strategy focused