organizational design, responsibility accounting, and

© McGraw-Hill Ryerson Limited, 2001Irwin/McGraw-Hill Ryerson

19-1

Organizational Design,Responsibility Accounting,

and Evaluation of DivisionalPerformance

Student Tutorial

19


19-2

Decentralized Organizations AndResponsibility Accounting

Most organizations are divided into smaller units, divisions, segments, business units, work centers, or departments

which have particular responsibilities

Most organizations are divided into smaller units, divisions, segments, business units, work centers, or departments

which have particular responsibilities

When the managers of subunits throughoutthe organization have incentives to performin the common interest of the organization

When the managers of subunits throughoutthe organization have incentives to performin the common interest of the organization

When do you have GOAL CONGRUENCE?When do you have GOAL CONGRUENCE?

BEHAVIOURAL CONGRUENCEPerformance evaluation and incentive systems are

designed to encourage employees to behave as if theirgoals are congruent with organizational goals.

BEHAVIOURAL CONGRUENCEPerformance evaluation and incentive systems are

designed to encourage employees to behave as if theirgoals are congruent with organizational goals.


19-3

Decentralized Organizations AndResponsibility Accounting

GOAL CONGRUENCE

GOAL CONGRUENCE

BEHAVIOURAL CONGRUENCE

BEHAVIOURAL CONGRUENCE

Various concepts and tools used to measure the performance

of people and the departments in order to foster goal

or behavioural congruence

Various concepts and tools used to measure the performance

of people and the departments in order to foster goal

or behavioural congruence

RESPONSIBILITYACCOUNTING

RESPONSIBILITYACCOUNTING


19-4

CentralizedOrganizations


DecentralizedOrganizations


Centralization Vs. Decentralization


19-5





Decisions arehanded down fromthe top echelon of

managementand subordinates

carry them out

Decisions arehanded down fromthe top echelon of

managementand subordinates

carry them out

Decisions aremade at

divisional anddepartmental levels

Decisions aremade at

divisional anddepartmental levels

Centralization Vs. Decentralization


19-6Benefits And Costs Of ADecentralized Organization

! Subunit managers are specialists

! Autonomy in decision makingprovides managerial training

! Managers with decision makingauthority usually exhibit greatermotivation

! Delegating provides time relief toupper-level managers

! Empowering employees draws onthe knowledge and expertise ofthose closest to operations

! Delegating to the lowest levelenables a timely response toopportunities and problems

! Managers sometimes have anarrow focus of their own units’performance rather than theorganization’s overall goals

! The narrow focus may causemanagers to tend to ignore theconsequences of their actionson the organization’s othersubunits

! Some tasks or services may beduplicated unnecessarily

BENEFITS COSTS


19-7Decentralized Organizations AndResponsibility Accounting -

Question #1Which of the following is more characteristic of adecentralized than a centralized organization?

A. Quick response time to changes in localconditions

B. The firm faces a relatively stable environmentC. The firm is relatively smallD. There is little incentive for lower level

management to make decisions

Which of the following is more characteristic of adecentralized than a centralized organization?






Question #1











Question #1









If the environment was stable, one person could runthe world. It is instability that gives rise to the need

for local decision-making. Try again.

If the environment was stable, one person could runthe world. It is instability that gives rise to the need

for local decision-making. Try again.



Question #1









If the firm is small, then why would we want todelegate authority to middle management? Try

again.

If the firm is small, then why would we want todelegate authority to middle management? Try

again.



Question #1Which of the following is more characteristic of adecentralized than a centralized organization?








Why would you want to put decision-makingauthority in the hands of unmotivated management?

Try again.

Why would you want to put decision-makingauthority in the hands of unmotivated management?

Try again.


19-12Responsibility AccountingThe purpose of a RESPONSIBILITY ACCOUNTING system is to

ensure that each manager and worker in the organization is striving toward the overall goals set by top management

The purpose of a RESPONSIBILITY ACCOUNTING system is to ensure that each manager and worker in the organization is

striving toward the overall goals set by top management

A RESPONSIBILITY CENTER is a subunit in an organization whose manager is held accountable for specified financial

and nonfinancial results of the subunit’s activities

A RESPONSIBILITY CENTER is a subunit in an organization whose manager is held accountable for specified financial

and nonfinancial results of the subunit’s activities

Cost CenterCost

Center

Discretionary Cost

Center

Discretionary Cost

CenterRevenue

CenterRevenue

Center

ProfitCenterProfit

Center

Investment Center

Investment Center

RESPONSIBILITYCENTERS

RESPONSIBILITYCENTERS


19-13Responsibility AccountingRESPONSIBILITY CENTERSRESPONSIBILITY CENTERS

InvestmentCenter

InvestmentCenter

• the manager is responsible for the profit and theinvested capital used to generate the profit

• the manager is responsible for the profit and theinvested capital used to generate the profit

ProfitCenterProfit

Center• the manager is responsible for the subunit’s profit • the manager is responsible for the subunit’s profit

RevenueCenter

RevenueCenter

• the manager is responsible for the revenue of the subunit

• the manager is responsible for the revenue of the subunit

DiscretionaryCost Center

DiscretionaryCost Center

• input-output relationships are not well specified• the manager is responsible for the cost of activities• input-output relationships are not well specified

• the manager is responsible for the cost of activities

Cost Center Cost Center• well-defined input-output relationships

• the manager is responsible for the cost of activities• well-defined input-output relationships

• the manager is responsible for the cost of activities


19-14Organization Chart: OutbackOutfitters, Ltd.

Salesdepartment

Investmentcenter

Investmentcenter

Profitcenter

Revenuecenter

Cost center

Cost center

President

Vice-president

General plantmanager

Sales dept.manager

Productiondept. manager

Supervisorof work center

OutbackOutfitters, Ltd.

Koala campgear division

Sydneyplant

Productiondepartment

Packagingwork center

Managers Responsibility center


19-15Performance ReportA performance report shows the budgeted and actual amounts

of key financial results appropriate for the type or responsibility involved

A performance report shows the budgeted and actual amounts of key financial results appropriate

for the type or responsibility involved

BUDGETEDamounts

of keyfinancialresults

BUDGETEDamounts


ACTUALamounts


ACTUALamounts


VARIANCEVARIANCE

Management by exception means management only follows upon the most significant variances

Management by exception means management only follows upon the most significant variances

Management by exception is used to control an organization’s operations effectively

Management by exception is used to control an organization’s operations effectively


19-16

Activity-Based ResponsibilityAccounting

Focus on the financial performance

measures of cost,revenues, and profit for thesubunits of the organization

Focus on the financial performance

measures of cost,revenues, and profit for thesubunits of the organization

Activity-basedresponsibility systems focus

not only on the cost ofperforming activities but on

the activities themselves

Activity-basedresponsibility systems focus

not only on the cost ofperforming activities but on

the activities themselves


19-17How Does ResponsibilityAccounting Affect Behaviour

The proper focus of a responsibility system

is informational

The proper focus of a responsibility system

is informational

Some organizations useperformance reports that

distinguish between controllable or uncontrollable costs or revenues

Some organizations useperformance reports that

distinguish between controllable or uncontrollable costs or revenues

Causing managers to react constructively and strive for

improved performance

Causing managers to react constructively and strive for

improved performance

Identifying costs as controllableor uncontrollable is not always

easy.

Identifying costs as controllableor uncontrollable is not always

easy.

A responsibility accountingsystem does not emphasize

blame

A responsibility accountingsystem does not emphasize

blameSome costs that are not

controllable in the short runbecome controllable in the

long run

Some costs that are not controllable in the short runbecome controllable in the

long run

Many costs are influenced by more than one person

Many costs are influenced by more than one person


19-18

Which of the following is not true about responsibilityaccounting?

A. Costs are classified on the basis of controllabilityB. Identifying costs as controllable or uncontrollable

is not always easyC. Some costs that are not controllable in the short

run become controllable in the long runD. Many costs are influenced by one personE. A responsibility accounting system does not

emphasize blame





emphasize blame

Decentralized Organizations AndResponsibility Accounting - Question #2


19-19

That’s true, but it doesn’t help us to answerthe question. Try again.

That’s true, but it doesn’t help us to answerthe question. Try again.





emphasize blame





emphasize blame



19-20

Of course it isn’t easy, but it isn’t right either.Try again.

Of course it isn’t easy, but it isn’t right either.Try again.





emphasize blame





emphasize blame



19-21

If they aren’t controllable in the short run, wecan’t hold someone responsible. Try again.

If they aren’t controllable in the short run, wecan’t hold someone responsible. Try again.





emphasize blame





emphasize blame



19-22





emphasize blame





emphasize blame



19-23

That’s just silly. Of course it emphasizesblame. That’s the point, isn’t it? Try again.That’s just silly. Of course it emphasizes

blame. That’s the point, isn’t it? Try again.





emphasize blame





emphasize blame



19-24

Production manager looks only at costsProduction manager looks only at costs

Sales manager looks only at benefits

Sales manager looks only at benefits

Motivating Desired BehaviourOrganizations often use the responsibility accounting system

to motivate actions considered desirable by upper-level management

Organizations often use the responsibility accounting system to motivate actions considered desirable

by upper-level management

Disrupted productionMore setupsHigher costsNeed for outsourcing

Disrupted productionMore setupsHigher costsNeed for outsourcing

Potential Costs of Accepting Rush Order

Potential Costs of Accepting Rush Order

Sometimes the responsibility accounting system can solve behavioural problems and promote teamwork

Sometimes the responsibility accounting system can solve behavioural problems and promote teamwork

Satisfied customersGreater future salesSatisfied customersGreater future sales

The modifiedresponsibility system

made the sales manager look at both the costs and benefits

Potential Benefits of Accepting Rush Order

Potential Benefits of Accepting Rush Order


19-25

Measuring Performance InInvestment Centers

Large subunits are usually designated as INVESTMENT CENTERSLarge subunits are usually designated as INVESTMENT CENTERS

The manager is held accountable for the INVESTMENT CENTER’Sprofits and the capital invested to earn that profit

The manager is held accountable for the INVESTMENT CENTER’Sprofits and the capital invested to earn that profit

The retail sales managerThe retail sales manager

Approves theoverall pricing

policies inthe retail

division’s stores

Approves theoverall pricing

policies inthe retail

division’s stores

Has the autonomy to sign contracts

to buy merchandise

for resale

Has the autonomy to sign contracts

to buy merchandise

for resale

Has the authority toto build new stores

rent space in shopping centers, or close existing

stores

Has the authority toto build new stores

rent space in shopping centers, or close existing

stores

These decisions influence theorganization’s profit

These decisions influence the amount

of capital invested in the division


19-26

Return On Investment As APerformance Measure

Mail Order Division

Koala Camp Gear Division Retail Division

Sales revenue $350,000,000 $405,000,000 $960,000,000Income 14,000,000 45,000,000 48,000,000Invested capital 70,000,000 300,000,000 480,000,000

Return on investment (ROI) = Return on investment (ROI) = IncomeInvested capital

IncomeInvested capital

Income Invested capital

= Return on Investment (ROI)

Mail-order division

$14,000,000 $70,000,000 = 20%

Koala Camp Gear division

$45,000,000 $300,000,000 = 15%

Retail division$48,000,000 $480,000,000 = 10%


19-27

Factors Underlying ROI

Return on investment Income

Invested CapitalIncome

Sales revenueSales revenue

Invested capital= = X

SalesMarginSales

Margin

CapitalTurnoverCapital

Turnover

Focuses on thenumber of sales

dollars generatedby each dollar of invested capital

Focuses on thenumber of sales

dollars generatedby each dollar of invested capital

Measures the percentage of each sales dollar that

remains as profit after allexpenses are covered

Measures the percentage of each sales dollar that

remains as profit after allexpenses are covered


19-28

Focuses on the number of salesdollars generated by each dollar of

invested capital

Focuses on the number of salesdollars generated by each dollar of

invested capital

Measures the percentage of each sales dollar that remains as

profit after all expenses are covered

Measures the percentage of each sales dollar that remains as

profit after all expenses are covered

Mail-order division

$14,000,000 $350,000,000

$350,000,000 $70,000,000 = 20%

Koala Camp Gear division

$45,000,000 $405,000,000

$405,000,000 $300,000,000 = 15%

Retail division$48,000,000

$960,000,000$960,000,000 $480,000,000 = 10%

SalesMargin

CapitalTurnoverX

Factors Underlying ROI

Return on investment Income

Invested CapitalIncome

Sales revenueSales revenue

Invested capital= = X

X

X

X


19-29

Improving A Division’s ROI

Retail division’sROI

Sales margin

Capital turnover

14% 7% 2

15% 5% 3

10% 5% 2Current retaildivision ROI

Improved retail

division ROI

Improved retail

division ROI

Increase sales marginIncrease sales price while selling less quantity

or decrease expenses

Increase capital turnoverIncrease sales revenues or reduce

the division’s invested capital

X


19-30

Compute CookevilleCorporation’s Asset

Turnover Ratio


Turnover Ratio??

Compute CookevilleCorporation’s Profit

Margin


Margin??

Return on InvestmentCookeville Corporation has provided the following information:

Sales: $1,000,000Income: $250,000

Assets: $5,000,000

Cookeville Corporation has provided the following information:Sales: $1,000,000Income: $250,000

Assets: $5,000,000


19-31


Turnover Ratio


Turnover Ratio

$1,000,000 ÷ $5,000,000 = 20%$1,000,000 ÷ $5,000,000 = 20%


Margin


Margin

$250,000 ÷ $1,000,000 = 25%$250,000 ÷ $1,000,000 = 25%


Sales: $1,000,000Income: $250,000

Assets: $5,000,000


Assets: $5,000,000


19-32

??

Compute Cookeville Corporation’s Return onInvestment



Sales: $1,000,000Income: $250,000

Assets: $5,000,000


Assets: $5,000,000


19-33

Profit Margin × Asset Turnover = ROI25% × 20% = 5%

Profit Margin × Asset Turnover = ROI25% × 20% = 5%




Sales: $1,000,000Income: $250,000

Assets: $5,000,000


Assets: $5,000,000


19-34

Residual Income As A PerformanceMeasure

Return on investmentin new equipment

Increase in divisional profitIncrease in invested capital

5,500,000$50,000,000

11%= = =

Cost of investment inCIM = $50,000,000

Results in annualoperating savings of $5,500,000

The company’s cost of capital = 10%

Koala Camp Gear Division’s Return on Investment

Without Investment inNew Equipment

With Investment inNew Equipment

$45,000,000 $300,000,000 = 15%

$45,000,000 + $5,500,000 $300,000,000 + $50,000,000 < 15%

Averaging the new investment with that already inplace reduces the division’s overall ROI


19-35


Divisional profit $45,000,000 $50,500,000

Less imputed interest charge: Invested capital $300,000,000 $350,000,000X imputed interest rate x .10 x .10

Imputed interest charge 30,000,000 35,000,000

Residual charge $15,000,000 $15,500,000

Koala Camp Gear Division’s Residual IncomeKoala Camp Gear Division’s Residual Income

Without Investment inNew CIM Equipment

Without Investment inNew CIM Equipment

With Investment inNew CIM EquipmentWith Investment in

New CIM Equipment

Investment in new equipmentraises residual income by

$500,000


19-36

Divisional profit $45,000,000 $50,500,000

Less imputed interest charge: Invested capital $300,000,000 $350,000,000X imputed interest rate x .10 x .10

Imputed interest charge 30,000,000 35,000,000

Residual charge $15,000,000 $15,500,000


Comparison of Residual Income: Two DivisionsComparison of Residual Income: Two Divisions

Mail-OrderDivision

Mail-OrderDivision

Koala CampGear DivisionKoala Camp

Gear Division

The Koala Camp Gear division’s residual income ismuch higher simply because it is larger than the

mail-order division


19-37


The Byrdstown Corporation has the following two divisions:DIVISION A DIVISION B

Sales $1,500,000 $2,000,000-Total variable costs 500,000 1,000,000-Total fixed costs 250,000 500,000Average assets invested 2,000,000 3,000,000

Assume a 10% target return on investment Compute divisional residual income

The Byrdstown Corporation has the following two divisions:DIVISION A DIVISION B

Sales $1,500,000 $2,000,000-Total variable costs 500,000 1,000,000-Total fixed costs 250,000 500,000Average assets invested 2,000,000 3,000,000

Assume a 10% target return on investment Compute divisional residual income


19-38

DIVISION A DIVISION BSales $1,500,000 $2,000,000-Total variable costs 500,000 1,000,000-Total fixed costs 250,000 500,000

$750,000 $500,000Average assets invested 2,000,000 X 10% = $200,0003,000,000 X 10% = $300,000

Residual Income $550,000 $200,000






19-39





Assume that Division B has the opportunity to make an investment in an asset costing $500,000 which will save $55,000. Assume an income of $500,000.




Assume that Division B has the opportunity to make an investment in an asset costing $500,000 which will save $55,000. Assume an income of $500,000.


19-40


Return on investmentin new equipment

Increase in divisional profitIncrease in invested capital

55,000$500,000

11%= = =

Cost of investment inCIM = $500,000

Results in annualoperating savings of $55,000

The company’s cost of capital = 10%

Division B’s Return on Investment

Without Investment inNew Equipment

With Investment inNew Equipment

$500,000 $3,000,000 = 16.67%

$500,000 + $50,000 $3,000,000 + $500,000 =15.7%

Averaging the new investment with that already inplace reduces the division’s overall ROI


19-41


DIVISION BSales $2,000,000 + $55,000 = $2,055,000- Total variable costs 1,000,000 1,000,000- Total fixed costs 500,000 500,000

$500,000 $555,000Average assets invested 3,000,000 X 10% = $300,000+ $500,000 $3,500,000

X 10% $350,000Residual Income $200,000 $205,000

DIVISION BSales $2,000,000 + $55,000 = $2,055,000- Total variable costs 1,000,000 1,000,000- Total fixed costs 500,000 500,000

$500,000 $555,000Average assets invested 3,000,000 X 10% = $300,000+ $500,000 $3,500,000

X 10% $350,000Residual Income $200,000 $205,000

The investment increases residual incomeThe investment increases residual income


19-42

Economic Value Added (EVA) As APerformance Measure

Economicvalueadded

Investmentcenter’s after-tax operating

profit

Investmentcenter’s

total assets

Investmentcenter’s current

liabilities

Weighted-averagecost ofcapital

= -- X

Two sources of long-termcapital: debt and equity

What does an EVA analysis tell us?What does an EVA analysis tell us?

How much shareholder wealth is being createdHow much shareholder wealth is being created

How does EVA differ from residual income?How does EVA differ from residual income?


19-43

Weighted Average Cost Of CapitalAfter-taxcost of

debtcapital

Weightedaveragecost of capital

Market value

of debt

Cost ofequitycapital

Market value ofequity

Market value

of debt


+

+

=

.063

.0972

$400,000,000 .12 $600,000,000

$400,000,000 $600,000,000

+

=

+


19-44

Economic Value Added ForOutback

Division Current LiabilitiesMail-Order $6,000,000Koala Camp Gear 5,000,000Retail 9,000,000

Outback Outfittershas $20 million incurrent liabilities

Outback Outfittershas $20 million incurrent liabilities

Economicvalueadded


profit


total assets


liabilities


=-- X

Mail-order $14 X (1 - .30) - [($ 70 - $6) X .0972] = $3,579,200Koala Camp Gear $45 X (1 - .30) - [($300 - $5) X .0972] = $2,826,000Retail $48 X (1 - .30) - [($480 - $9) X .0972] =$(12,181,200)


19-45


debtcapital

Market value

of debt



+

Chattanooga Manufacturing Company has the followingcapital structureBonds-market value $5,000,000After-tax cost of debt capital 6.5%Common stock-market value $10,000,000Cost of equity capital 10.0%

Chattanooga Manufacturing Company has the followingcapital structureBonds-market value $5,000,000After-tax cost of debt capital 6.5%Common stock-market value $10,000,000Cost of equity capital 10.0%


19-46


debtcapital

Weightedaveragecost of capital

Market value

of debt



Market value

of debt


+

+

=

.065 $5,000,000 .10 $10,000,000

$5,000,000 $10,000,000

+

=

+

.08833


19-47


Economicvalueadded


profit


total assets


liabilities


= -- X

Assume the Chattanooga Manufacturing Company has two divisionswith the following data:

After-TaxCurrent Operating TotalLiabilities Income Assets

Division A: $1,000,000 $5,000,000 $ 8,000,000Division B: $2,000,000 $1,000,000 $15,000,000





19-48








After-Tax Operating Current Total Income Liabilities Assets WACC

Division A: $5,000,000 - [($1,000,000 - $ 8,000,000) X .08833]Division B: $1,000,000 - [($2,000,000 - $15,000,000) X .08833]

After-Tax Operating Current Total Income Liabilities Assets WACC



19-49


After-Tax

Operating Current Total Income Liabilities Assets WACC


After-Tax

Operating Current Total Income Liabilities Assets WACC


Division A: $5,000,000 - [$ -7,000,000) X .08833]Division B: $1,000,000 - [$-13,000,000 X .08833]

Division A: $5,000,000 - [$ -7,000,000) X .08833]Division B: $1,000,000 - [$-13,000,000 X .08833]

EVA

Division A: $5,000,000 - 618,310 = $4,381,690Division B: $1,000,000 - 1,148,290 = $ (148,290)

EVA

Division A: $5,000,000 - 618,310 = $4,381,690Division B: $1,000,000 - 1,148,290 = $ (148,290)

Division B is not creating shareholder wealthDivision B is not creating shareholder wealth


19-50

What Is The Division’s InvestedCapital?

Total productiveassets

Total productiveassets

Total assetsTotal assets

Total assets lesscurrent liabilities

Total assets lesscurrent liabilities

Appropriate if the division manager has considerable authority in makingdecisions about all of the division’s

assets, including nonproductive assets

Appropriate if the division manager has considerable authority in makingdecisions about all of the division’s

assets, including nonproductive assets

Appropriate if the division manager has been directed by top level management

to keep nonproductive assets in progress, making it appropriate to exclude

nonproductive assets fromthe measure of invested capital

Appropriate if the division manager has authority to secure short-term bank

loans and other short-term credit


19-51

Gross bookvalue is

acquisitioncost

Assets - Gross Or Net Book ValueCurrent assets (cash, accounts receivable, inventories, etc.) $34,000,000Long-lived assets (land, buildings, equipment, vehicles, etc.) Gross book value (acquisition cost) $304,000,000 Less: Accumulated depreciation 64,000,000 Net book value 240,000,000Plant under construction 26,000,000Total assets $300,000,000

Net book value is

acquisitionvalue less

accumulateddepreciation

Current assets $34,000,000Long-lived assets (at gross book value) 304,000,000Plant under construction 26,000,000

Total assets (at gross book value) $364,000,000


19-52

Net Book Value Versus Gross BookValue

! Using net book value maintainsconsistency with the balancesheet prepared for externalreporting purposes

! Using net book value tomeasure invested capital is alsomore consistent with thedefinition of income, which isthe numerator in ROIcalculations

! Using net book value maintainsconsistency with the balancesheet prepared for externalreporting purposes

! Using net book value tomeasure invested capital is alsomore consistent with thedefinition of income, which isthe numerator in ROIcalculations

! The usual methods ofcomputing depreciation arearbitrary and should not beallowed to affect ROI, residualincome, or EVA calculations

! When long lived assets aredepreciated, their net bookvalue declines over timeresulting in a misleadingincrease in ROI, residualincome, and EVA across time

! The usual methods ofcomputing depreciation arearbitrary and should not beallowed to affect ROI, residualincome, or EVA calculations

! When long lived assets aredepreciated, their net bookvalue declines over timeresulting in a misleadingincrease in ROI, residualincome, and EVA across time

Advantages of net book value; disadvantages

of gross book value

Advantages of net book value; disadvantages

of gross book value

Advantages of gross book value; disadvantages

of net book value

Advantages of gross book value; disadvantages

of net book value


19-53Methods Of MeasuringInvestment-Center Income

The key issue is controllability; the choice involves the extent to whichuncontrollable items are allowed to influence the income measure

The key issue is controllability; the choice involves the extent to whichuncontrollable items are allowed to influence the income measure

Sales revenueLess: unit-level, batch-level, product-level and customer-level expense

= (1) Divisional contribution margin

Sales revenueLess: unit-level, batch-level, product-level and customer-level expense

= (1) Divisional contribution margin

Less: general and facility-level expenses controllable by division manager= (2) Profit margin controllable by division manager

Less: general and facility-level expenses controllable by division manager= (2) Profit margin controllable by division manager

Less: general and facility-level expenses, traceable to division, but controlled by others

= (3) Profit margin traceable to division

Less: general and facility-level expenses, traceable to division, but controlled by others

= (3) Profit margin traceable to division

Less: common general and facility-level expenses, allocated fromcompany headquarters

= (4) Divisional income before interest and taxes

Less: common general and facility-level expenses, allocated fromcompany headquarters

= (4) Divisional income before interest and taxes

Less: income taxes allocated from company headquarters= (6) Divisional net income

Less: income taxes allocated from company headquarters= (6) Divisional net income

Less: Interest expense allocated from company headquarters= (5) Divisional income before taxes

Less: Interest expense allocated from company headquarters= (5) Divisional income before taxes


19-54

Alternatives To ROI, ResidualIncome And EVA

ROIResidual Income

EVA

Short-run performancemeasures

Multiperiod viewpoint

Takes into account

the timing of cash flows

in the investment

Actual divisionalprofit for a time

period is compared to aflexible budget

and variances areused to analyze

performance

The division’smajor investments

are evaluatedthrough a

postaudit of theinvestmentdecisions


19-55

End of Chapter 19

At least my division did well.I wonder how the whole

company did?

organizational design, responsibility accounting, and

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