Discuss one potential problem that might be experienced as a result of using ROI-新东方在线职业题库

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Discuss one potential problem that might be experienced as a result of using ROI to appraise the performance of the divisions.Recommend one alternative performance measure that could be used to address this problem.

Chapter21Performancemeasurement

The use of ROI as a performance measure might lead to dysfunctional behaviour by divisional managers. They might be tempted to avoid investing capital in their respective divisions. This would reduce the average capital employed in order to achieve a higher level of ROI.

Residual income (Rl) is an alternative measure of divisional performance. It encourages divisional managers to make new investments if they add to Rl. A new investment might add to Rl but reduce ROI. In such a situation, measuring the performance by Rl would reduce the probability of dysfunctional behaviour.

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What does an adverse variable overhead efficiency variance indicate and what might be the cause?

Explain briefly the possible causes of

(i) A favourable material usage variance

(ii) A favourable labour rate variance

(iii) An adverse sales volume contribution variance.

What is the relationship between the labour efficiency variance and the variable overhead efficiency variance? Why might the monetary value be different?

Explain the meaning and relevance of interdependence of variances when reporting to managers.

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