Documente Academic
Documente Profesional
Documente Cultură
Pros
Better
Cons
Costly
duplication of activities
Lack of goal congruence
Goal Congruence
Goal congruence
means that as people
work to achieve their
own goals, they also
work to achieve the
goals of the
company.
4
Responsibility Accounting
A responsibility accounting system generates
reports to employees, including managers,
about the performance of their assigned
responsibility.
Cost Centers
Measures of Performance
Companies use four principal measures to
evaluate divisions:
Income
Return on Investment (ROI)
Residual Income (RI)
Economic Value Added (EVA)
10
ROI Formula
ROI = Divisional income/Divisional
investment
Companies define and measure divisional
income and divisional investment in various
ways.
11
12
An ROI Example
2002
Divisional sales
Divisional income (NOPAT)
Average divisional as sets
2003
Divisional sales
Divisional income (NOPAT)
Average divisional assets
NOPAT
NOPAT is net operating profit after tax
Equals net income plus interest net of tax
Relates income to assets utilized to
generate that income
Does not consider the effect of using
financial leverage (debt) on the rate of
return
Is consistent with return on assets from
Acct 284
14
Alpha Alpha
2002
2003
10.0%
7.1%
1.667 2.917
16.7% 20.7%
Beta
2002
4.2%
3.429
14.4%
Beta
2003
4.6%
3.429
15.8%
15
17
ROI Versus RI
18
19
21
22
23
2005
Net operating profit after
tax (NOPAT)
Capital charge
EVA
Increase in EVA
2004
165,579 $
136,684
139,793
119,101
25,786
17,583
8,203 $
-*
24
2005
2005
136,351 $
129,511
100,782
86,341
38,832
11,955
275,965
227,807
Taxes (40%)
110,386
91,121
NOPAT
165,579 $
136,686
Capital charge is calculated by multiplying weighted average EVA capital by our weighted average cost of capital. A reconciliation of total net
assets to ending EVA capital follows (in thousands):
2005
Total assets
Total liabilities
1,696,953
2004
$
1,370,882
537,648
523,589
1,159,305
847,293
87,919
171,305
162,803
162,803
Other*
143,740
141,977
Net assets
Long-term debt and capital lease
obligations
EVA capital
1,553,767
1,323,378
25
26
27
Transfer Price
Sometimes a center with
no external customers is
made into an artificial
profit center. Then
transfer prices, which are
prices that one center
charges another center
within the company, are
needed.
28
29
Actual Cost
These transfer prices are not wise because
the selling manager has no incentive to keep
costs down.
Worse, a price that is actual costs plus a
percentage markup gives the selling manager
more profit the higher costs go.
30
Budgeted Cost
This method does not
reward the selling
manager if costs go
up, and actually
encourages the
selling manager to
keep costs down.
31
Market-Based Prices
This method is generally consider, the best.
The biggest problem is that an outside
market price may not exist.
The transfer price may be less than the market
price due to cost savings from selling internally.
32
Incremental Cost
Such prices are theoretically best from the
companys viewpoint when the selling
division is operating below capacity.
Incremental cost can be as low as the variable
cost of the goods or services.
33
Negotiated Prices
This method allows managers to bargain
with each other and alleviates some
problems that arise with other methods.
Normally will lead to the right outcome if
managers negotiate in good faith.
34