Catanduanes Island, Philippines Explain the importance of organizational structure to Y-Van Ye MMT managerial reporting. Elaboratethedifferencesamongcentalization decentralization (ike Aas hau and empowerment. Ro) aos Distinguish authority, responsibility, and accountability, Discuss the different types of responsibility centers. Explain the concept of controllability in relation to responsibility accounting. Prepare a segment performance report... Evaluate profit cener's performance using the segment margin. analysis. Evaluate investment center's performance using the ROI, residual income, economic value added, equity spread, and other segments assessment models.CHAPTERS —RESP( ONSIBILITY ACCOUNTING and SEGMENT EVALUATION 384 centralization, Decentralization, and Empowerment pecisions forge organizations Ee ecienaen Decisions may bee fashioned in a centralized, decentralized, lized_or See Alsat barnes Gxists when decisions rest only to the top management is when the authority to make decisions is delegated to responsible officers. in different organization espo : al_units. Ei decentralization, provides great results ither decision model, centralization or Managers have already realized they can produce more astounding results and accumulate more wealth by doing things along with others, When top management trains, trusts, and delegates authority to capacitated personnel operating decisions are made flexible, suitable, and faster leading to more satisfied and delighted customers. These organizational attributes are needed to stay abreast and be relevant in a competitive market. This premise strengthens the practice of decentralization in managing large organizations. New organizations are bolder in their approach of trusting men up to the level of the production supervisor and his teammates in the quality circle. The power to make decisions is delegated to the organization's grassroots up to the level of ordinary personnel. This model of entrusting authority is called empowerment and serves well in an environment characterized by disruptive changes This powerful model in managing organizational men, however, is not covered in our discussions. Fig. 8.1 shown on the next page shows the basic difference among centralization, decentralization, and empowerment in terms of the power to make organizations decisions. Authority, responsibility, and accountability Authority is the power to do or not to do, give orders, give command, give instructions, or jis the duty to do or not to do an activity according to the make decisions. Responsibility order given. Accountability is the ‘answerability on the consequences of what had been done, undone, or had not been done. Authority and responsibility must go together, one should not be present without the other. Authority without responsibility is absolute power and absolute power corrupts absolutely. Responsibility without authority is blind obedience, a plain servitude. Equationally, we could express that: Fig. 8.1. Authority and ResponsibilityMENT EVALUATION CHAPTER 8, EG! 385 RESPONSIBILITY ACCOUNTING and SI ecentralization, and Empowerment Fig. 8.2. Decision Levels in Centralization, D Du cd As authority is shared to trusted men, responsibility must be performed in line with the principle of accountability. The manner on how the authority is exercised and the effects of the acts performed to fulfill a responsibilty should be evaluated. This is the moving concept of accountability. Withoutit, there would be no logical value of assessing how things are done and what have been done. Without accountability there would be no compelling reasons to evaluate performance fairly and objectively. In an expanded equation, we could say: Fig. 8.3. Authority, Responsibility, and Accountability ‘Authority and responsibility would loose their intrinsic . ui is in this context that the power of individuals is haneee 9S Without accountability. It lanes principle gives bith othe powerful dea of rowing Tener eat an recngrized. Ts Responsibility centers i decentralized decision-making model, divisions, . espadered responsibilty centers, Each center Seats segments, or units are ibility center cou! an investment center, profit Y @ responsible officer. A vicisi ah enter, revenue center, ora cost hese a a|APTER8 RES Gy PONSIBILITY ACCOUNTING and SEGMENT EVALUATION. 386 center. sstment cent fompany eer Apron ia on which strategic business opportunity should the incurrence of costs. A revenue ler manager controls both the generation of income and enter manager has a control SRG manager ee the generation of revenue. Acost nee over . shows the scope and relationships of these cer i eee of costs. The diagram below Fig. 8.4. Responsibility Centers and Organizational Structure Chief Executive Officer = Dep't Mgr 3 Responsibility centers ‘Supervisor 3 Production Production Production Personne! Personnel Personnel Inthe hierarchical organizational design presented above, there are six levels starting from the corporate headquarter chief to the division heads down to the workers. The perspective of our discussions gears towards a holding company ‘operating domestically or internationally. The corporate headquarter is headed by the Chief Executive Officer. The holding company has divisional units that are legally separate and independent from it. A division is managed by a President with his Vice Presidents to assist him in running the affairs of the business. Organizational designs Organizational strategy precedes structure. The overall corporate strategy defines the powers and duty to be eral to a division manager based on organizational priority or emphasis in-agiven period of performance. A division is an investmert center or a business segment faving its separately defined business ‘and financing activities from that of the parent or n yer of organizational emphasis, for example, may be on the controling company. The first la function: eee, Heck fines, or geographical areas as depicted in Fig, 8.6 iad sheets x FeLUATION CHAPTER g . 2 NT EVAI 387 ~ RESPONSIBILITY ACCOUNTING and SEGME Fig 8.5. Organizational Layer of Emphasis Functional Services Sales, Production HR, Legal, Administration, Marketing etc Product Product 1, Product 2 Product Area, Geographical Region Pr The layer of emphasis normally ‘speaks of the overall strategy adopted by the enterprise. Figures "8.6" to "8.8" is an illustration on how people would be assigned throughout the organizational structure. Fig. 8.6. Organizational Design with Emphasis on Functional Responsibility Lares tT. |APTER 8 /ALUATION CH, 389 RESPONSIBILITY ACCOUNTING and SEGMENT Evi i Sf raphical Area o Fig. 8.8. Organizational Design with Emphasis on Geograph Responsibility es ung re This organizational design emphasizes the strategic importance of geographical areas such as northern operations, southern operations, eastern ‘operations, and the like, Further, the said geographical area of operations sub-categorized into a more detailed areas such as region 1, region 2, and the like. Accordingly, men shall be grouped along these lines and all other subsequent or lower business units would subordinate their decisions, actions, and reports to the product line managers. Authrorities and Fesponsibilities will be delegated according to the areas of operations and performances shall be rewarded accordingly. It should be highlighted that in the creation of organizational desi Ns the chi officer stays at the top and the personnel at the bottom, ‘The middle ee oo ceri or rearranged according to the strategies adopted by the organization. Controllability and responsibility centers The span of authority given to a manager defines the ares F trollability refers to the power of the manager to decide nove Which he has controls, Con- lecide or int i incurrence ofan item, event, or activity. This concept of contrenaen’® the incurrence or non- rollability is extremely j t measuring a person's performance where it stat: ‘Mely importan' voice Guess *s that a manager should be evaluated ‘A responsibility center manager has to. understand ‘the breath and depth of his ity, The Sea,CHAPTERS RE : SPONSIBILITY ACCOUNTING and SEGMENT EVALUATION 390 authority entrusted to the mai signed to him, Consequently, fete should commensurate with the responsibility as- is ‘ eae _ the need to evaluate managerial ear ao his actions or inaction! This modelstresses _ Fig. 8.9. Responsibility Centers and Performance Evaluation Profit or Loss ‘Strategies MOTIVATION ——}> MIND ——} ears Propesiooc eu pcg ; Reporting system: Rewards and recognition Performance Evaluation A manager's performance should be evaluated in line with the established objectives and standards of his center. Different responsibility center managers should be evaluated differently inasmuch as their authority, responsibility, and accountability vary from each other. Performance evaluation (i.e., performance measurement, feedback) is a control issue. It may be implemented before, during or after a process. Performance is assessed based on Teports submitted to and gathered by the manager. Therefore, an effective, reliable, timely, Verifiable, and relevant reporting system must be in. place. Responsibility accounting reports May either be information reports or performance reports. Reports submitted by-a responsibility center manager should segregate the controllable from the ea items. Managers’ performance should ‘be measured for items they’ I e techniques used in measuring manage fc ne are Fi bere iti ee , ‘/ALUATION CHAPTER 8 391 RESPONSIBILITY ACCOUNTING and SEGMENT EW ility Centers Table 8.1. Basis of Evaluating Respons' Evaluation Techniques + Cost variance analysis + Revenue variance analysis Responsibility Center Manager + Cost center manager + Revenue center manager ‘Segment margin analysis Return on investment (ROI), Residual income model, + Economic value added (EVA), + Equity spread, etc + Profit center manager * Investment center manager Cost center manager's performance Acost center manager has control or influence over the incurrence or non-incurrence of costs. The cost center manager report should separate the controllable from the non-controllable costs and should highlight the variances between the actual and budgeted costs. Let us refer to the organizational chart shown in Fi manager 2. He reports to the Vice President for P: An abbreviated example of a department manag in the following page. 9. 8.4, on page 386- Focus on department roduct 2 and has 3 supervisors under him ers report is presented in Table 8.2 shown Variances are identified as either unfavorable (U) or favorable Indicate excessive costs and should be avoided. Favorable varia should also be investigated. (F). Unfavorable variances Inces mean Savings, however, The three (3) production supervisors have already submn; duction manager2. The summary ofthese siperiears ee Tel tespective reports to pro: contreleble heme rest center 1”, “cost center 2", and "cost seo ptuedin the departments controllableitems. The other controllable coste arn direct costs oy and included in the ment manager's department. These i oe Operating depart- the Vice-President for 2 items are captured | Product 2 to be submitted to the Chief Operating onean ea es in Table g. able 8.3 on page 393. -CHAPTERS RESPONSIBILITY ACCOUNTING and SEGMENT EVALUATION 392 Table 8.2. Department Manager's Performance Report Performance Report = Costt PM comortion —] Center Manager Department Manager 2 September 9-15, 20CY Performance Report Controllable Costs ‘Actual Budget Variance ~ U (F) eee P_ 832,000 P 845,000 P (13,000) F eae 655,000 650,000 5,000 U Cost center 3 440,000 450,000 (10,000) F Direct materials 590,000 580,000 10,000 .U Direct labor 900,000, 920,000 ( 20,000) F Indirect materials 6,000 27,000 (1,000) F Fringe benefits 40,000 38,000 2,000 U Factory supplies 33,000 36,000 (3,000) F Electricity and water 20,000 25,000 ( 5,000) F Telecommunications 18,000 12,000 6,000 U Gas and oil 9,000 10,000 ( 1,000) F Repairs and maintenance 21,000 19,000 2,000 U Supervisors’ salaries 92,000 90,000 2,000 U Miscellaneous 44,000 —42.000 (3.000) F Total controllable costs 3.720.000 3.749.000 (29.000) F Noncontrollable Costs Managers’ salary 70,000 66,000 4000 U Depreciation expense 90,000 95,000 (5,000) F Rent expense 22,000 26,000 (4,000) F Allocated costs 86.000 — 06.000 = Total noncontrollable costs 248,000 — 253,000 —(5,000) Total costs 3,968,000 P4,002,000 24.000) F Lee Wher d in the VP for Product 2's report, the department ma ager's 2 report ee tein “line item’. In the same way, the report of the VP for Product 2 to the Chief Executive Officer will also be presented ina single line, Atthe end of the reporting line, the Chief Executive Officer has only @ page of report summarizing the vital information in the organization.LUATION CHAPTERS 393 RESPONSIBILITY ACCOUNTING and SEGMENT EVA Table 8.3. Vice-President's Performance Report X Corporation Performance Report Vice-President for Product 2 September 9-15, 20CY [ Variance- UF (F) Controllalble Costs Actual pee P (14,000) F Department Manager 1 P 3,336,000 P 3350000 apa) 4 Department Manager 2 3,720,000 3 ‘oon (10,000) F Department Manager 3 2,290,000 2,300, o 2,000 U Office Salaries 122,000 y2bom ( 4/000) F Fringe benefits 20,000 24,000 bn 00) F ‘Supplies 23,000 25,000 ( oy Electricity and water 33,000, 38,000 ( a ) a Telecommunications 48,000 50,000 (2,000) Gas and oil 19,000 17,000 2,000 U Miscellaneous 64,000 69,000 —(5.000) F Total controllable costs 9675000 73742.000 — (67.000) F Noncontrollable Costs VP Production Salary 80,000 80,000 * Depreciation expense 300,000 300,000 * Allocated costs —— 466,000 —466.000 Total noncontrollable costs 246.000 — 846,000 Total costs Bapsziong = piasagonn =p 67000) Revenue center manager's performance revenue. When the actual revenue is greater than bay revenue variance, and vicewersa. A favorable variance cone phete is a favorable surate reward and recognition however should be | mediately evaluetod re nen omme™ further improvements. While an unfavorable variance enacts be criticane cor learning and its recurrence, itically studied to avoid Responsibility centers that are responsible in dey, eloping and mai Such 28 sources of materials and labor may also be cache 2s revenues of supply ‘enue centers.TER RE! CHAP’ ‘SPONSIBILITY ACCOUNTING and SEGMENT EVALUATION 394 profit Center Manager's Performance rofit center manager . Elie! ees ates ae over revenues and costs, His managerial performance Frepertonnence margin while the center's performance is evaluated based ofa profitcenter on segment (or direct) margin. TI a relbsan gin. The controllable margin and segment margin computations = "ease" Table 8.4. Segment Margin Contribution margin Px Less: Controllable direct fixed costs —= and expenses Controllable margin oh x Less: Noncontrollable direct fixed costs and expenses = __X Segment margin Bax Deduct the allocated (or indirect or unavoidable) fixed costs and expenses from the segment margin and you will get the operating profit. The difference between controllable margin and segment margin is fixed cost and expenses controllable not by the concerned manager but by others. the actual controllable margin and segment margin should be compared with the budgeted amounts to get the variances and evaluate performances, Sample Problem 8.1. Segment Performance Bajada Corporation has been ‘experiencing negative operating results in the last six quarters. its most recent income statement is as follows: Sales P 6,300,000 Less: Variable costs ee Contribution margin 826 ( Less: Fixed costs 2.906.000 Profit p_(-0.00) The company operates three productilines which has the following related data 1,200,000 2,100,000 P3,000,000 6,300,000 Sales 00 st 520000 880,000 800,000 1,900,000 ae ae — 02000 102,000 102,000 306,000 Noncontrollable direct fixed costs 220,000 ‘na. anno 1,120,000 Variable cost ratio 56% Required: Compute the segment margin for each of the product lines and of the ‘corporation. Evaluate the data.UATION CHAPTER8 395 RESPONSIBILITY ACCOUNTING and SEGMENT EVAL Solutions/Discussions: F termined as follows: The segment margins of the three pode lines are ae Total A 00,000 Sales 1,200,000 P2,100,000 P 3,000,000 ee = Variable costs 72000 _eB20d0 1220000 — 0) ong Contribution margin 528,000 1,218,000 1,080, ~ Controllable direct fixed costs 220,000 880,000 280,000 926,000 Controllable margin 308,000 338,000 ee iad aol = Noncontrollable direct fixed costs220,000 100,000 Eten (194,000) Segment margin 88,000 238,000 + ( 520,01 "306,000 Allocated fixed costs__102,000 __102,000 ___102,000 Profit (loss) BC 14000) 2136000 e(.622000) p500.000) Product line B registers the best performance in terms of peso amount amounting toa. segment margin of P238,000 and margin return on sales of 1 1% (i.e P238,000/ P2,100,000). Product line C produces a negative segment margin of P520,000. This product line does not contribute to the overall profitability of the company but rather reduces the overall amount of the company's profit by the amount of its negative segment margin. Product line C, based on the computations above, should be disposed In terms of individual segment manger's performance, the manager of product line B Stil registers the best performance posting a controllable margin of 16% (i.e, P338,000/ 2,100,000) compared to that of product line C’s manager of 9% (i.e., P280,000/ P3,000,000) and that of product line As manager of 3% (i.e., P308,000/P7,200,000) Investment Center Manager's Performance The investment center manager has authority to decide over which inv: should be considered and pour in the funds for investments. As such, Nice evaluated based on the results of investments. The cost-benefit criterion plays a vital role in the investment selection decision process. The benefit refers to the retures derived from investments while the cost refers to the amount used in undertaking the opportunity. i There are several models in evaluating investment center the return on equity, return on investment (DuPont Model sages ee eene added, equity spread, total shareholders retutn, and the market cals oe ee extensively discuss the ROI (retum on investment) model, residual we eoe WE Will now economic value added (EVA) model, : ‘al income model, and the The investement center is herein also referred to as a division The Return on Investment (ROI) The ROI is sometimes referred to as return on asset (ARR). Itis computed as follows: * (ROA), oF accounting rate of returnHAPTER 8 —-RESPOI cl SIBILITY ACCOUNTING and SEGMENT EVALUATION 396 Fig. 8.9. Return on Investment a second look, i en ie eee rece that the RO! is a measure of benefit over cost analysis. °°! Sa eM ahich ie areter ede ament profit while the cost is the amount of the segment inves is preferred to be the assets employed in the division. Profit? (ovestment The higher the ROI, the better it will be for the business. The issue, therefore, is how to increase ROI. Quantitativeh = iavestment, as follows: ly speaking, ROI is increased by increasing profit and reducing Fig. 8.10. Increase in ROI The Du Pont Model EI. du Pont de Nemours and Company, commonly referred to as DuPont, an American chemical company that was founded in July 1802 and is one of the worlds largest chemi- cal company based on market capitalization, evaluates the performance of its numerous business investments using an extended RO! model as follows: Fig. 8.11. The Du Pont Model ROl= ROSKAT This model encourages investment center managers to wisely take investments only for those which are of relevance to thelr operations. This will result to efficiency in allocating investment funds. Only those investment of which the investment center manager has control and use in operations shall be included in the ROI determination, Sample Problem 8.2. Return on Investment .s that the company has P5,000,000 invest- ‘5 balance sheet indicate: in20C 1ed P'1,100,000 of profit on P11,000,000 Frances Beau Corporation’ In 20CY, Frances Beau earn ment in operating assets. of sales. Required: Determine the following for Frances Beau: 1. Profit margin for 20CY. 2. Assets turnover for 20CV- 3. Return on investment for 20CY.LUATION CHAPTER 8 397 RESPONSIBILITY ACCOUNTING and SEGMENT EVA tions: 4. ROI under each of the following elect praiit increases from P1,100,000 a. Sales increase from P5 million to P6 mi to P1,300,000. rofit increases by b. Sales remain constant, costs and expenses decrease while P eae i ffecting the profit. ¢. The amount of investment is decreased by P400,000 without a ig the pi Solutions/Discussions: 1. Profit margin or return on sales is computed as follows: Profit margin = Profit / Net sales = P1,100,000 / P11,000,000 = 2. The assets turnover is determined as follows: Assets turnover = Net sales / Assets = P11 million/P 5million = 2.2 3. ROI = Retum on sales x Assets turnover = 10% x 2.2 = 22% or, ROI may be computed directly as RO! = Profit/ Average assets used = P1,100,000/P5,000,000 = 22% 4.a. ROI = P1,300,000/P6,000,000 = 21.67% 4.b. ROI = (P1,100,000 + 400,000) / P5,000,000 = 29% 4.c. ROI = P1,100,000/ P4,600,000 = 23.91% The ROI and its limitations ! The use of ROI has several imitations. Significant differences in the a from one project to another and the siferences in the life ofthe asset used ie Helen Opportunities may render the use of ROI dificult to i ‘A consider the following: apply. To highlight these limitations, Company A Return on investment te Company B Amount of investment P1 billion a 40% Life of assets in years Tayo million 2 yearsTER CHAPTER 8 RESPONSIBILITY ACCOUNTING and SEGMENT EVALUATION 398 The size matters... Using the RO!, company B mana A manager with 20% Rol. each manager respectively, Yompany B) is a lot mt ompany A). ger with 40% ROI would be better off than that of company However, considering the amount of investment supervised by we could easily say that managing a million worth of business uch easier than managing a billion worth of business resources The asset life also matters... Also, considering the life span of the assets used, company 8's performance is an utter dismay because only 80% of the investment would be recovered in 2 years, which is the life of the investment, given a 40% ROI per annum. This performance falls short of recovering the entire amount of investment over its Operational life. Whereas company A has a total return of 300% (e.9., 20% x 15 years) which means investment in company A is recoverable three times and is indeed better than the 80% recovery rate of company B. The special assignment matters... ROI model may not also be the most suitable method in evaluating the performance of an excellent manager who is assigned to make a business turnaround performance, say to deliver a profitable performance of a previously unprofitable operations. The Residual Income Model The limitations encountered in applying the RO! is improved by the residual income model that uses amount as a basis of evaluating the acceptance of a prospective investment or the performance of an investment project. The residual income is computed as follows: Table 8.5. Residual Income The segrrient income is income expressed before tax. Segmentincome also refers to earnings before interest and tax (eg, EBIT) or the operating profit, Minimum income is sometimes labeled as imputed income, implied income, implicit income or desired income, i in computing the minimum income is to the amount agreed upon ieee taee et eae eee tobe determined by the corporate headquarter management. Normally, the imputed interest ‘ate is based on the prevailing market rate from which the business generates profit without accepting @ high business risk. The imputed rate is ordinarily the pre-tax cost of capital, and i fii he 6s wast Slice DualprengHAPTER 8 VALUATION Cl 399 RESPONSIBILITY ACCOUNTING and SEGMENT E sponsibility center. If the f risk of the reporting /°Ft therefore, favorable. ve standard ant ¢ it considers two levels of f the excess return over the in principle, should reflect the degree of be residual income is positive, the performance is 4! becaus¢ Residual income is considered superior than the AO ke eae assessments, the compliance to minimum return an\ same minimum return. Sample Problem 8.3. Residual Income 0 Northern Division's performance: relative t Tom crporaien gathered the following data Beano coo 0 Costs and expenses a Average operating assets 9,000, Desired minimum (or imputed) rate of return established by management 15% Average industry rate of return 28% : Income tax rate 40% Compute the Northern Division's residual income. Solutions/Discussions: Seaman profit (P12 mn et 1 million) P 1,000,000 ess: Minimum income (P5 million x 15%) 750,000 Residual income B250.000 The average industry rate of return, though may be consid, ler desired rate of return, is different ftom the minimum rate of etree nd te minimum of return. The desired minimum income is normally express, ed ' compared with operating income or segment prof, Unt Before tax, hence, itis or standards set by top management in t considered acceptable. Economic value added ‘The economic value added (EVA) i it € Ev ) is a more Specific after-tax y, Fepresents the business unit's true economie m, ersion of residual i capitals imple in the cost of capital. The costoretae @ change in the ane salah The EVA Te aati have been obtained with the best alten 2" °PPortunity coer thats, the The EVA is computed as follows: ative investment having simi oe Kk similar risk.CHAPTER RESPONSIBILITY ACCOUNTING and SEGMENT EVALUATION 400 Table 8.6. Economic Value Added The operating profit after tax (OPAT) is computed by multiplying the earnings before interest and taxes (EBIT) by the after-tax rate (ie., 1 - Tax rate). The weighted average cost of capital is computed after tax. EVA measures the marginal benefit obtained by using resources in relation to the business of increasing shareholders’ value. Some adjustments in EBIT are needed such as research and development (R&D) costs which are capitalized and amortized over 5 years. The true economic depreciation rather than the accounting depreciation used for tax purposes is to be used in computing the EVA. Sample Problem 8.4. Economic Value Added Global Holdings operates Star Corporation, a division in electronics industry, and provided you the following data with regard to the division's 20CY performance: Divisional income before interest and tax 200 million Interest expense P 60million Tax rate 40% Weighted average cost of capital 12% Average total assets Carrying amount P 90 million Current value P120 million Average current liabilities P 40 million Required: Economic value added (EVA) assuming the investment base is: Market value of long-term financing. Carrying amount of long term financing. Market value of total assets. Carrying amount of total assets. Reno Solutions/Discussions: 1. Investment base is the market value of long-term financing. OPAT (P200 million x 60%) P 120.00 million Less: Minimum return on market value of long-term financing [(P120 million - P40 million) 12% ] 9.60 million Economic value added 2110.40 millionCHAPTER 8 ATION NT EVAL 401 RESPONSIBILITY ACCOUNTING and SEGME se a _— financing: __— roo f long-term finer investment base is the carrying amount 01 10° pi2eioomitlien cin OPAT amount of fong:ter™ financing 6 a0 million Less: Minimum return on carryin L [(P90 million - P40 million) 12%] 114.00 million Economic value added on Iiseae UGSUTETT base Te he avalkat value of te et. investment base is the market value of the total aS5 P 120.00 million OPAT fe term asset : Less: Minimum return on market value of long-term 14.40 million ( P120 million x 12% ) £105.60 million Economic value added 4,_ Investment base is the carrying amount of the total asset: OPAT 120.00 million yt ts, Less: Minimum return on carying amount of long-term asset (P30 million x 12%) 10.80 million 2109.20 million Economic value added The economic value added is a measure of the management effectiveness in increasing investors’ value. The best investment base to use is the market value of the long-term fi- nancing. The market value is used to reflect the true amount of investment and the exercise prudence in the process. Also, long-term financing is Used to isolate the interest of the true investors from the short-term ones. Maximizing the interest of long-term investors, both creditors and owners, are the real intentions of enterprise management. i Other investment center evaluation models Other divisional evaluation models are equity spread, total shareh ; 4 , ol value added. The equity spread, like the EVA, is also a straightforward’ ea ey ing managerial performance regarding creation.of shareholder wayne oot ease as follows: Value. It is computed Table 8.7. Equity Spread The return on equity is equal to profit divided by average sharehold : ers’ equity,