Professional Documents
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Decentralized Performance
Evaluation
ACCT 2200
PROFESSOR THOMAS BOURVEAU
Decentralization of Responsibility
Decentralization pushes
decision making down
to lower-level managers.
Decentralization of Responsibility
Responsibility Centers
Responsibility accounting gives managers authority
and responsibility for a particular part of the
organization and then evaluates them based on the
results of that area of responsibility.
Managers of responsibility
centers should be held
responsible only for that
which they can control.
Financial
Internal
business
processes
Performance
measures
Learning
and growth
Residual Income
Residual Income
As the store manager at Apples Online Store, you have the opportunity to
invest $1,000,000 in a project promising a return of $150,000 (15
percent).
Limitations of Financial
Performance Measures
Both ROI and residual income are lagging indicators of
financial performance. These measures tell how well a
company or a division has done in the past but not
necessarily how well it will do in the future.
To improve short-run financial
results, managers may make harmful
decisions to cut costs in areas such
as research and development,
employee training, or quality of
manufacturing materials.
Compute the Return on investment and the residual income for each
hotel of the group.
Vaison
Hotel
Hotel revenues (sales)
Hotel variable costs
Hotel fixed costs
Hotel operating profit
Interest costs on long-term debt at 10%
Profit before income taxes
Income taxes at 30%
Net profit
Average book values for 2011
Current assets
Long-term assets
Total assets
Current Liabilities
Long-term debt
Stockholders' equity
Total liabilities and shareholder equity
1,200,000
310,000
650,000
240,000
-
400,000
600,000
1,000,000
50,000
-
Perpignan
Hotel
La Rochelle
hotel
Total
450,000
600,000
180,000
420,000
500,000
600,000 1,500,000
1,500,000 2,400,000 4,500,000
2,000,000 3,000,000 6,000,000
150,000
-
300,000
-
500,000
4,500,000
1,000,000
6,000,000
22
Desfleurs: ROI
Return on Investment (ROI)
Hotel
Vaison
Perpignan
La Rochelle
Operating profit
Total assets
ROI
240 000
300 000
510 000
1 000 000
2 000 000
3 000 000
=
=
=
24%
15%
17%
23
Operating Profit
240,000
300,000
510,000
=
=
=
=
Residual
income
120,000
60,000
150,000
24
Assume
Desfleurs requires a rate of return on investment of 12%
Expansion of Vaison Hotel will increase operating profit by 160,000 and
increase total assets by 800,000
Problem of
suboptimization
25