Download - Financial Performance Measures Chapter 8 Managerial Accounting Concepts and Empirical Evidence
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FinancialPerformance Measures
Chapter 8
Managerial Accounting
Concepts and Empirical Evidence
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Managerial AccountingManagerial AccountingConcepts and Empirical EvidenceConcepts and Empirical Evidence
Jess Co.Comparison of Profit Centers
Allocated Corporate Costs
(not controllable at subunit level)
SU1 SU2
$4,000,000
3,000,000
Revenues
Variable Costs
Contribution Margin
Controllable Fixed Costs
Controllable Profits
$2,000,000
1,200,000
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Managerial AccountingManagerial AccountingConcepts and Empirical EvidenceConcepts and Empirical Evidence
Jess Co.Comparison of Profit Centers
1,000,000
Allocated Corporate Costs
(not controllable at subunit level)
SU1 SU2
800,000
$4,000,000
3,000,000
Revenues
Variable Costs
Contribution Margin
Controllable Fixed Costs
Controllable Profits
$2,000,000
1,200,000
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Managerial AccountingManagerial AccountingConcepts and Empirical EvidenceConcepts and Empirical Evidence
Jess Co.Comparison of Profit Centers
1,000,000
Allocated Corporate Costs
(not controllable at subunit level)
SU1 SU2
700,000 950,000
$100,000 $50,000
800,000
$4,000,000
3,000,000
Revenues
Variable Costs
Contribution Margin
Controllable Fixed Costs
Controllable Profits
$2,000,000
1,200,000
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Managerial AccountingManagerial AccountingConcepts and Empirical EvidenceConcepts and Empirical Evidence
Jess Co.Comparison of Profit Centers
Revenues
200,000
Variable Costs
Contribution Margin
Controllable Fixed Costs
Controllable Profits
$2,000,000
1,200,000
SU1 SU2
700,000 950,000
$100,000 $50,000
800,000
$4,000,000
3,000,000
1,000,000
500,000Allocated Corporate Costs
(not controllable at subunit level)
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Managerial AccountingManagerial AccountingConcepts and Empirical EvidenceConcepts and Empirical Evidence
Jess Co.Comparison of Profit Centers
Revenues
200,000
Variable Costs
Contribution Margin
Controllable Fixed Costs
Controllable Profits
$2,000,000
1,200,000
SU1 SU2
700,000 950,000
$100,000 $50,000
800,000
$4,000,000
3,000,000
1,000,000
500,000Allocated Corporate Costs
(not controllable at subunit level)
![Page 7: Financial Performance Measures Chapter 8 Managerial Accounting Concepts and Empirical Evidence](https://reader031.vdocuments.site/reader031/viewer/2022032205/56649e8a5503460f94b8f85a/html5/thumbnails/7.jpg)
Managerial AccountingManagerial AccountingConcepts and Empirical EvidenceConcepts and Empirical Evidence
Jess Co.Comparison of Profit Centers
1,000,000
500,000Allocated Corporate Costs
(not controllable at subunit level)
SU1 SU2
700,000 950,000
$100,000 $50,000
800,000
$4,000,000
3,000,000
Revenues
200,000
Variable Costs
Contribution Margin
Controllable Fixed Costs
Controllable Profits
$2,000,000
1,200,000
NET OPERATI NG PROFI T $500,000 $450,000
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Managerial AccountingManagerial AccountingConcepts and Empirical EvidenceConcepts and Empirical Evidence
I
APROI
AP = Accounting ProfitsAP = Accounting Profits(income)(income)
I = Accounting Value of InvestmentsI = Accounting Value of Investments(assets)(assets)
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Managerial AccountingManagerial AccountingConcepts and Empirical EvidenceConcepts and Empirical Evidence
AP in above needs to be AP in above needs to be thought of as NIthought of as NI
SE = Stockholders’ EquitySE = Stockholders’ Equity
ROE (Return on Equity) = AP/SE ROE (Return on Equity) = AP/SE
= [(AP/TR) * (TR/I)] [I/SE ]= [(AP/TR) * (TR/I)] [I/SE ]
= (ROI) . (I/SE)= (ROI) . (I/SE)
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Managerial AccountingManagerial AccountingConcepts and Empirical EvidenceConcepts and Empirical Evidence
n
tt
t
IRR
CFCF
10 )1(
CFCF00 =initial cost of Investment =initial cost of Investment
CFCFtt = net cash flow in period t = net cash flow in period t
n = economic life of capital projectn = economic life of capital project
IRR = internal rate of returnIRR = internal rate of return
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Managerial AccountingManagerial AccountingConcepts and Empirical EvidenceConcepts and Empirical Evidence
)*( kIAPRI
AP = accounting profitsAP = accounting profits
I = accounting value of investmentI = accounting value of investment
k = cost of capitalk = cost of capital
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Managerial AccountingManagerial AccountingConcepts and Empirical EvidenceConcepts and Empirical Evidence
IkROIRI *)(
I
RIkROI
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Managerial AccountingManagerial AccountingConcepts and Empirical EvidenceConcepts and Empirical Evidence
Jess Co.Comparison of Controllable Profits ROI and RI
SU1 SU2
$175,000 $200,000
$950,000
19%Controllable ROI
Controllable RI
Controllable Profits $700,000
20%
Based on controllable investment levels of
$3,500,00 and $ 5,000,000 in SU1and
SU2 respectively
Based on controllable investment levels noted before and a
capital charge equal to 15% of the subunit
investment level
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Managerial AccountingManagerial AccountingConcepts and Empirical EvidenceConcepts and Empirical Evidence
GI
CFCRR A
CFCFAA = annual cash flows from operations = annual cash flows from operations
GI = gross fixed investmentsGI = gross fixed investments
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Managerial AccountingManagerial AccountingConcepts and Empirical EvidenceConcepts and Empirical Evidence
titftmitfti RRRR ,,,,, )( RRi,ti,t = stock return for firm = stock return for firm ii in period in period tt
ii = beta (i.e, measure of risk) for firm = beta (i.e, measure of risk) for firm ii
RRm,tm,t = market return in period = market return in period tt
RRf,tf,t = risk-free return in period = risk-free return in period tt
i,ti,t = error term for firm = error term for firm ii in period in period tt
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Managerial AccountingManagerial AccountingConcepts and Empirical EvidenceConcepts and Empirical Evidence
RC
MVq
RC = replacement cost of firm’s tangible assetsRC = replacement cost of firm’s tangible assets
MV = total market value of a firm (including stock and debt)MV = total market value of a firm (including stock and debt)
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Managerial AccountingManagerial AccountingConcepts and Empirical EvidenceConcepts and Empirical Evidence
BKMVMVA
MV = total market value of a firm (including stock and debt)MV = total market value of a firm (including stock and debt)
BK = accounting book value of a firmBK = accounting book value of a firm