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Abrams Company

By: Achmad Faizal Azmi (361160)

Abrams Company is a large manufacturer of different parts for cars, trucks and buses.
A company main objective is extraction of profit and achieving target Return of Investments
(ROI). The company shares on four departments three of which are aimed at details
production according to the customer’s requirements, quality and competitive price. The sales
part of these departments sale these details to OEM companies. The fourth department is
After Market (AM) department which sells details to secondary market and to wholesalers. It
doesn't have own department of production, therefore details which didn't manage to be sold
to ОЕМ companies get here. Each department works with their own customers, that’s why
Abrams’ company doesn't have coherent plan on achievement of a break-even sales level and
general profit. Instead of it, income and sales volume level is established in each department
separately. From the Top Management view, the AM department should bring 50% of all
profit of the company during the year. It is a quite difficult goal because divisions which are
producing haven’t got the guidance by needs and requirements of AM department. In related
to this, the policy of production of details for a total market should proceed not only from
needs of customers, but also with АМ department needs. Each department should reach target
ROI level by the end of each year. ROI Calculation is produced as the profit of the company
divided to net assets on the beginning of year as company management considers that
investments into the capital within a year practically don't influence profit volume. Expenses
are included in company profit over the planned rate and taxes, equity cost is settle up on the
beginning of the year, so the profit increase is equal to increase of ROI. Company
management considers that it allows seeing more detailed picture of business as a whole, and
separate departments as in each department.

However, It is very difficult to find a relevant and fair capital base for the ROI
measure. In real world, satisfactory definition of profit and investment are difficult to find.
Profit has many concepts such as profit before interest and tax, profit after interest and tax,
controllable profit, profit after deducting all allocated fixed costs. Similarly, the term
investment may have many connotations such as gross book value, net book value, historical
cost of assets, current cost of assets, assets including or excluding intangible assets. In this
case, Abrams use book value for fixed assets which increase the ROI measure as the assets
goes older. The aging and mix of assets also differs among divisions which give the

Therefore. Balanced scorecard helps to integrate various top management programmes. with a good performance measurement system. If the company change to Residual Income or Economic Value Added. R.N. Moreover. Boston: McGraw Hill . it is better for Abrams company to use establish a non-financial performance measurement system such as the balanced scorecard. Govindarajan (2007). and learning and growth. internal business processes. it will reduce the bonus given to the management. the incentive compensation plan will be improved and hopefully it will increase the productivity and profitability of the Abrams company as a whole. Management Control Systems. 12 th Ed. it will be possible to to negotiate relevant inventory levels in the budget process. ROI based bonus may distract the future orientation. since when company want to invest in assets. Therefore. the problem with the inventory level can not be controlled with ROI management.relatively unfair measurement. customer. and V. The balanced scorecard measures performance from four interrelated perspectives: financial. It is also easy for the divisions to manipulate the capital base at the end of the year. Sources: Anthony.