Performance Management Flashcards
(23 cards)
Which cost center can be evaluated by ROCE?
Investment Centers
Other name for ROCE?
ROI
Two performance measures for investment Centers
ROI and ROCE
ROI equation
Profit/Capital employed %
I.e. controllable divisional profit/divisional capital employed
RI equation
Profit minus notional interest charge for invested capital
Omitted variable bias/
Cause and effect bias
Attributing cause to the wrong variable
Cognitive bias
Presenting results in the wrong way e.g. infographics
Confirmation bias
Confirming exiting beliefs and ignoring contradictions
Survivorship bias
Ignoring areas that don’t perform well
Imputed interest
Profit - residual income
What to do if unlimited capital?
As many separate investments as increases ROI
How to work out the optimum selection of investments with different ROIs?
- Pick the investment with the highest ROI
- Work out the cumulative ROI of this plus previous investments
- Repeat with the next highest individual ROI until the cumulative ROI goes down
Cumulative ROI
(Profit 1 + Profit 2/Capital 1 + Capital 2)
Types of costing methods
- Specific order
- Process
Types of specific order costing methods
- Job
- Batch
- Contract
What is specific order costing good for?
When each cost unit is separately identifiable
Job costing
Customers specific requirements
Short duration
Contract costing
Separate cost unit
Long duration
Often away from business premises
Batch costing
Group of identical items (batch) treated as a cost unit
Process (continuous operation) costing
Costing done per period, per cost center
Unit cost = process cost for period/no. units produced
This cost is carried though to next process until product finished
Life cycle costing
Takes into account all costs and revenues of a product over entire life span (R&D, training, production, distribution, marketing, retirement/disposal)
Target costing
Target cost worked backwards from concept, acceptable selling price and profit margin.
JIT costing
Aim to have no inventory
Pull not push system
Consists of JIT purchasing and JIT production
