financial performance measures chapter 8 managerial accounting concepts and empirical evidence
TRANSCRIPT
FinancialPerformance Measures
Chapter 8
Managerial Accounting
Concepts and Empirical Evidence
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
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
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
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)
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)
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
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)
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)
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
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
Managerial AccountingManagerial AccountingConcepts and Empirical EvidenceConcepts and Empirical Evidence
IkROIRI *)(
I
RIkROI
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
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
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
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)
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