L13/14 Performance measurement and management Flashcards
(12 cards)
What are some advantages of decentralisation?
1) Top management freed from everyday problems to focus on strategic issues
2) Lower-level management gains experience
3) Motivation
4) Better information
5) Evaluation of performance
What are some disadvantages of decentralisation?
1) Loss of bigger picture
2) Lack of coordination
3) Conflict of interest and agendas
4) Communication
What are some measures of divisional performance?
Financial responsibility centres: Cost centres, profit centres, investment centres
What are some examples of divisional profit measures?
Contribution margin
Controllable profit = (contribution margin - non controllable fixed costs)
What is the ROI?
Net profit/Investment in net assets
OR
(Sales/Investment in net assets) X (net profit/Sales)
OR
ASset turnover X profit margin
What is the ROCE?
Annual business segment earnings / Average segment capital employed
What are some advantages and disadvantages of ROI?
Advantages:
-Relative measure taking into account profit and assets
-Compatible with conventional financial reports
-Enables comparison between firms/divions
Disadvantages:
-Calculation of operating profit in each division; it may be difficult to determine divisional specific revenue and expenses
What is residual income?
(Controllable operating income) - (cost of capital)
Cost of capital = (minimum desired rate of return X investment in the division)
What is transfer pricing?
Ascertaining the price at which a good is sold internally between different strategic business units/division of the same, decentralised firm.
What constitutes a good transfer price?
-Maximises the economic benefit of the company as a whole
-Facilitates localised decision making
-Appeals to divisional managers
-Tax saving
What is economic based transfer pricing?
Where the transfer price = opportunity cost
What are the three transfer pricing systems?
1) Market-based transfer prices
2) Cost-based transfer prices
3) Negotiated prices
