Int. Acc. MA LECT 7: CH 19 Control systems and performance measurement…
Int. Acc. MA LECT 7: CH 19 Control systems and performance measurement part 2:
Making good planning and control decisions requires information about how different subunits of the organisation have performed.
This chapter discusses the design and uses of performance measures.
Performance measures are a central component of management control systems.
Design an accounting-based performance measure
EXAMPLE SLIDE 30-35/64
From the example
A major weakness of comparing operating profits alone is ignoring differences in the size of the investments in each hotel.
Investment refers to the resources or assets used to generate profit.
A firm‘s assets' sole purpose is to generate revenues and produce profits
3 performance measures including investment
2. Residual income(RI)
3. Economic value added(EVA®).
1. Return on investment (ROI):
Income ÷ Investment
Income: operating profit
Can be compared with ROI on opportunities
Investment: Total assets
Also called the accounting rate of return
Capital assets are often the biggest investment for most companies. In this case, the company invests money into capital assets and the return is measured in profits.
4. Return on sales (ROS).
Accounting performance measures can have different
names in different companies
Managers can influence the way how accounting performance measures are calculated
Accounting performance measures are not audited
Comparability among firms is difficult
Understand the return on
investment (ROI) method of profitability analysis
The ROI method of profitability analysis recognises that there are two basic ingredients in profit making:
Increasing income per unit (e.g.€,£) of revenue.
Using assets to generate more revenue
Slide example + formula slide 42
Describe the residual-income (RI) measure
Residual income (RI)
is an accounting measure of profit minus a required monetary unit (e.g. €, £) return on an accounting measure of investment.
Residual profit (RI) = Income – (Required rate of return × Investment)
It measures the return earned by the department which is in excess of the minimum required return.
Minimum required return on assets: Opportunity cost, the percentage return which the firm expects to earn on an alternative project.
RI > 0 : The department has met the minimum return
RI < 0: The department has failed to meet the minimum return requirement