MN1018: MANAGEMENT ACCOUNTING

Seminar 7: Performance measurement

Exercise 1 (based on Bhimani et al. 2015):

a) “Residual Income is not identical to Return on Investment (ROI) although

both measures incorporate profit and investment into their
computations”. Do you agree? Explain.
b) “Managers should be rewarded only on the basis of their performance
measures. They should be paid no (fixed) salary”. Do you agree? Explain.

Exercise 21:

Western Company’s US division earned operating income last year as shown in

the following income statement:

Sales $480,000

Cost of Goods Sold ($222,000)

Gross Margin $258,000

Selling and Administrative Expense ($210,000)

Operating income $48,000

At the beginning of the year, the value of operating assets was $277,000. At
the end of the year, the value of operating assets was $323,000.

Required:

For the US division, calculate the following: (1) average operating assets, (2)
margin; (3) turnover; (4) return on investment (ROI).

Exercise 32:
1
Based on Mowen et al. (2010)
2
Based on Crosson/Needles (2008)
The financial results for the past two years for Ornamental Iron, a division of
the Iron Foundry Company, are as follows:

Iron Foundry Company/Ornamental Iron Division

Balance Sheet/December 2007 and 2008

Assets 2008, $ 2007, $

Cash 5,000 3,000

Accounts receivable 10,000 8,000

Inventory 30,000 32,000

Other current assets 600 600

Plant assets 128,300 120,300

Total assets 173,900 163,900

Liabilities and Stockholders’ Equity

Current liabilities 13,900 10,000

Long-term liabilities 90,000 93,900

Stockholders’ equity 70,000 60,000

Total liabilities and 173,900 163,900

stockholders’ equity

Iron Foundry Company/Ornamental Iron Division

Income Statement for the years ended December 31, 2007 and 2008
 2008, $ 2007, $

Sales 180,000 160,000

Cost of goods sold 100,000 90,000

Selling and 27,500 26,500

administrative expenses

Operating income 52,500 43,500

Income taxes 17,850 14,790

After-tax operating 34,650 28,710

income

Required:

1. Compute the division’s profit margin, asset turnover, and return on

investment for 2008 and 2007. Beginning total assets for 2007 were
$157,900. Round to two decimal places.

2. The desired return on investment for the division has been set at 12
percent. Compute Ornamental Iron’s residual income for 2008 and 2007.

3. The cost of capital for the division is 8 percent. Compute the division’s
economic value added for 2008 and 2007.

4. Before drawing conclusions about this division’s performance, what

additional information would managers want?

Exercise 4:
Consult your textbook Atrill/McLaney (2012), pp. 419ff. and answer the
following questions:

a) What are non-financial performance measures? Provide some examples.

b) What are advantages and disadvantages of using non-financial
performance measures?