Performance Measurement

and Balanced Scorecard

BA 115 Lecture

Not for reproduction / distribution; for classroom use only

Return on Investment (ROI)
𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐼 =
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

• Income usually refers to earnings before interest and tax (EBIT)

• Investment usually refers to average of total assets between the
beginning and the end of the year
• The higher a business segment’s ROI, the greater the profit earned
per dollar invested in the segment’s operating assets

Not for reproduction / distribution; for classroom use only

Return on Investment (ROI)
• Can be expressed in terms of margin and turnover
𝐸𝐵𝐼𝑇 𝑆𝑎𝑙𝑒𝑠
𝑅𝑂𝐼 = 𝑥
𝑆𝑎𝑙𝑒𝑠 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
• Example:
• Sales = $100,000; EBIT = $10,000
• Beginning total assets = $25,000; Ending total assets = $75,000

10,000 100,000
𝑅𝑂𝐼 = 𝑥
100,000 (25,000 + 75,000)
2

𝑅𝑂𝐼 = 10% 𝑥 2 = 20%

Not for reproduction / distribution; for classroom use only
Residual Income
𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝐸𝐵𝐼𝑇 − 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝐸𝐵𝐼𝑇 − (𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑠𝑠𝑒𝑡𝑠 𝑥 𝑀𝑖𝑛. 𝑟𝑒𝑡𝑢𝑟𝑛 𝑟𝑎𝑡𝑒)

• The residual income approach encourages managers to make

investments that are profitable for the entire company but that would
be rejected by managers who are evaluated using the ROI formula

Not for reproduction / distribution; for classroom use only

Not for reproduction / distribution; for classroom use only
Balanced Scorecard
• Consists of an integrated set of performance measures that are
derived from and support a company’s strategy
• Commonly presents both financial and nonfinancial performance
measures:
• Financial
• Customer
• Internal Business Process
• Learning and Growth
• Incentive compensation for employees, such as bonuses, may be tied
to balanced scorecard performance measures
Not for reproduction / distribution; for classroom use only
Example: Royal Dutch Shell

Not for reproduction / distribution; for classroom use only

Example: Royal Dutch Shell

Not for reproduction / distribution; for classroom use only

Example: Royal Dutch Shell

Not for reproduction / distribution; for classroom use only

Reference

• Brewer, P. C., Garrison, R. H., & Noreen, E. W. Introduction to

Managerial Accounting

Not for reproduction / distribution; for classroom use only