ACG 6305 Management Accounting: Examination 4 Outline (100 pts.

Q1. Chapter 11 (40 points): Performance Measurement in Decentralized Organizations

Major topics:
 Some advantages and disadvantages of decentralization;
 Responsibility accounting for segments (cost, revenue, profit, and investment centers);
 Measuring managerial performance in investment centers: ROI, RI, or EVA®;
 Calculate return on investment (ROI) using the DuPont method with margin and turnover
(ROI = margin x turnover), and residual income (RI) (examples: E11-6 and E11-12);
 The DuPont method adds sales to the ROI formula and facilitates further analysis using,
e.g., the DuPont Diagram (Exhibit 11-1, page 512);
 Three ways to improve ROI (increase sales, reduce expenses, and reduce assets);
 ROI advantages (e.g., can compare segments of different sizes) and some criticisms of
ROI (e.g., may lead to the rejection of profitable investment opportunities; examples:
Winston, Inc., in PowerPoint slides and E11-12);
 RI is often more compatible than ROI with investment decision models (e.g., NPV and
IRR models) but is an absolute measure that cannot be used to compare divisions of
different sizes (however, could use relative RI %s (not in textbook) and/or track %
change in RI from year to year (page 515));
 EVA® is a variant of RI with adjustments; e.g., R&D is treated as an investment not an
expense.
 The balanced scorecard is an integrated set of performance measures that are derived
from and support the company’s strategy (Q11-9);
 Using a balanced scorecard management translates its strategy into performance
measures that employees understand and influence;
 It is typically divided into four perspectives: 1) learning and growth, 2) internal business,
3) customer, and 4) financial (e.g., ROI, RI, or EVA®); #1-3 performance measures are
leading indicators of future financial performance but #4 performance measures are
lagging indicators of past financial performance (Q11-10)
 Testable hypotheses of cause-and-effect linkages in balanced scorecards;
 The entire organization should have an overall balanced scorecard and each responsible
individual should have a personal scorecard;
 Incentive compensation should be linked to scorecard performance measures;
 ROI and the balanced scorecard: a balanced scorecard helps identify ways to increase
sales, decrease expenses, and reduce assets that are consistent with a company’s strategy;
 Three delivery performance measures: 1. Throughput time, 2. Manufacturing cycle
efficiency (MCE), and 3. Delivery cycle time (e.g. in PowerPoint slides and E11-3).