cpa review bec module 45 performance measures and management techniques
TRANSCRIPT
CPA review BEC Module 45Performance Measures and Management Techniques
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Organization of Module 45
A. Financial and Nonfinancial Performance
B. Balanced Scorecard and Performance Measures
C. Value Based Management
D. Choosing Among Different Performance Measures
E. Traditional Financial Statement Analysis
F. Benchmarking and Best Practices
G. Quality Control Principles
H. Cost of Quality
I. Business Process Management
J. Project Management
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Concept of Performance Measures and Management Techniques
• Financial and nonfinancial measures are used for a variety of purposes including: resource allocation, incentive compensation, divisional and business unit evaluation, budgeting and planning.
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Internalbusiness
processes
Customers
Learningand growth
The Balanced ScorecardManagement translates its strategy into performance measures that employees
understand and influence.
Management translates its strategy into performance measures that employees
understand and influence.
Performancemeasures
Financial
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The Balanced Scorecard: FromStrategy to Performance Measures
FinancialHas our financial
performance improved?
CustomerDo customers recognize that
we are delivering more value?
Internal Business ProcessesHave we improved key business processes so that we can deliver
more value to customers?
Learning and GrowthAre we maintaining our ability
to change and improve?
What are ourfinancial goals?
What customers dowe want to serve andhow are we going towin and retain them?
What internal busi-ness processes arecritical to providing
value to customers?
Vision and
Strategy
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The Balanced Scorecard: Non-Financial Measures
The balanced scorecard relies on non-financial measures in addition to financial measures for two reasons:
Financial measures are lag indicators that summarize the results of past actions. Non-financial measures are leading indicators of future financial performance.
Financial measures are lag indicators that summarize the results of past actions. Non-financial measures are leading indicators of future financial performance.
Top managers are ordinarily responsible for financial performance measures – not lower level managers. Non-financial measures are more likely to be understood and controlled by lower level managers.
Top managers are ordinarily responsible for financial performance measures – not lower level managers. Non-financial measures are more likely to be understood and controlled by lower level managers.
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Understanding Return On Investment
ROI = Net operating income
Average operating assets
Margin = Net operating income
Sales
Turnover = SalesAverage operating assets
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Increasing ROI – An ExampleRegal Company reports the following:
Net operating income $ 30,000
Average operating assets $ 200,000
Sales $ 500,000
Operating expenses $ 470,000
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$30,000 $500,000
× $500,000$200,000
ROI =
6% 2.5 = 15%ROI =
ROI = Margin Turnover Net operating income Sales
Sales Average operating assets×ROI =
Increasing ROI – An Example
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Investing in Operating Assets to Increase SalesAssume that Regal's manager invests in a $30,000
piece of equipment that increases sales by $35,000, while increasing operating expenses by
$15,000.
Regal Company reports the following:
Net operating income $ 50,000
Average operating assets $ 230,000
Sales $ 535,000
Operating expenses $ 485,000
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Investing in Operating Assets to Increase Sales
$50,000 $535,000
× $535,000$230,000
ROI =
9.35% 2.33 = 21.8%ROI =
ROI increased from 15% to 21.8%.ROI increased from 15% to 21.8%.
ROI = Margin Turnover Net operating income Sales
Sales Average operating assets×ROI =
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Criticisms of ROI
Telling managers to increase ROI may not be enough..
A manager who takes over a business segment typically inherits many committed costs over which the manager has no control.
A manager who is evaluated based on ROI may
reject investment opportunities…
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Calculating Residual Income
Residual income
=Net
operating income
-Average
operating assets
Minimum
required rate of return
( )This computation differs from ROI.
ROI measures net operating income earned relative to the investment in average operating assets.
Residual income measures net operating income earned less the minimum required return on average operating
assets.
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Residual Income – An Example
Division A Division B
Average operating assets $1,000,000 $3,000,000
Net operating income $ 200,000 $ 450,000
Minimum required return: 12% × average operating assets 120,000 360,000
Residual income $ 80,000 $ 90,000
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Residual Income – An Example
Average operating assets (a)$1,000,000 $250,000 $1,250,000
Net operating income (b)$ 200,000 $ 40,000 $ 240,000
Minimum required return: 12% × (a) 120,000 30,000 150,000
Residual income $ 80,000 $ 10,000 $ 90,000
PresentNew
Project Overall
Average operating assets (a)$1,000,000 $250,000 $1,250,000
Net operating income (b)$200,000 $40,000 $240,000
ROI (b) ÷ (a) 20.0% 16.0% 19.2%
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GPM = Gross Profit/Net Sales
GPM = $986,000/$3,074,000 = 32.1%
Gross (Profit) Margin
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OPM = EBIT/Net Sales
Your book hasOPM = operating income/Net Sales
OPM = $418,000/$3,074,000 = 13.6%
Operating Profit Margin
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ROA = Earnings Available to Common Stockholders Total Assets
You book has
ROA = Net income after interest and taxes average total sales
ROA = $221,000/$3,597,000 = 6.1%
Return on Total Assets (ROA)
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ROE = $221,000/$1,754,000 = 12.6%
ROE = Earnings Available to Common Stockholders
Total Equity
You book hasROE = Net income after interest and taxes
average common stockholders equity
Return on Equity (ROE)
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Current Ratio
Current ratio = total current assets
total current liabilities
Current ratio = $2,447,830 = 1.24
$1,968,662
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Quick ratio = Total Current Assets - Inventory
total current liabilities
Quick ratio = $2,447,830 - $300,459 = 1.09
$620,000
Quick Ratio
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Cash Ratio
Cash ratio = Cash
total current liabilities
Cash ratio = $680,623 = 0.346
$1,968,662
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Debt to Total Assets Ratio =
Total Liabilities/Total Assets
Debt Ratio = $1,643,000/$3,597,000 = 45.7%
Debt to Total Assets Ratio
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Times Interest Earned = EBIT/Interest
Times Interest Earned = $418,000/$93,000 = 4.5
Times Interest Earned Ratio
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A constraint (also called a bottleneck) is anything that prevents you from getting more of what you want.
The Theory of Constraints is based on the observation that effectively managing the constraint is the key to success.
The constraint in a system is determinedThe constraint in a system is determinedby the step that has theby the step that has the smallest capacitysmallest capacity.
Theory of Constraints
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4. Recognize that the weakest linkis no longer so.
4. Recognize that the weakest linkis no longer so.
1. Identify the weakest link.1. Identify the weakest link.
2. Allow the weakest link to set the tempo.
2. Allow the weakest link to set the tempo.
3. Focus on improving
the weakest link.
3. Focus on improving
the weakest link.
Only actions that strengthen the weakest link in the “chain” improve the process.
Theory of Constraints
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Six SigmaA process improvement method relying on customer feedback and fact-based data gathering and analysis
techniques to drive process improvement.
A process improvement method relying on customer feedback and fact-based data gathering and analysis
techniques to drive process improvement.
Refers to a process that generates no more
than 3.4 defects per million opportunities.
Refers to a process that generates no more
than 3.4 defects per million opportunities.
Sometimes associated
with the term zero defects.
Sometimes associated
with the term zero defects.
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Six Sigma
Stage GoalsDefine ● Establish the scope and purpose of the project.
● Diagram the flow of the current process.● Establish the customer's requirements for the process.
Measure ● Gather baseline performance data related to the existing process.● Narrow the scope of the project to the most important problems.
Analyze ● Identify the root cause(s) of the problems identified in the Measure stage.
Improve ● Develop, evaluate, and implement solutions to the problems.
Control ● Ensure that problems remain fixed.● Seek to improve the new methods over time.
The Six Sigma DMAIC Framework