【论述题】
Compare and contrast the use of residual income and return on investment in divisionalperformance measurement, stating the advantages and disadvantages of each.
【论述题】
Compare and contrast the use of residual income and return on investment in divisionalperformance measurement, stating the advantages and disadvantages of each.
The residual income (RI) for a division is calculated by deducting from the divisional profit an imputed interest charge, based on the investment in the division.
The return on investment (ROI) is the divisional profit expressed as a percentage of the investment in the division.
Both methods use the same basic figure for profit and investment, but residual income produces an absolute measure whereas the return on investment is expressed as a percentage.
Both methods suffer from disadvantages in measuring the profit and the investment in a division which include the following.
(i) Assets must be valued consistently at historical cost or at replacement cost. Neither valuation basis is ideal.
(ii) Divisions might use different bases to value inventory and to calculate depreciation.
(iii) Any charges made for the use of head office services or allocations of head office assets to divisions are likely to be arbitrary.
In addition, return on investment suffers from the following disadvantages.
(i) Rigid adherence to the need to maintain ROI in the short term can discourage managers from investing in new assets, since average divisional ROI tends to fall in the early stages of a new investment. Residual income can overcome this problem by highlighting projects which return more than the cost of capital.
(ii) It can be difficult to compare the percentage ROI results of divisions if their activities are very different: residual income can overcome this problem through the use of different interest rates for different divisions.
多做几道
A public health clinic is the subject of a scheme to measure its efficiency and effectiveness. Among a number of factors, the 'quality of care provided' has been included as an aspect of the clinic's service to be measured. Three features of 'quality of care provided' have been listed.
(1) Clinic's adherence to appointment times
(2) Patients' ability to contact the clinic and make appointments without difficulty
(3) The provision of a comprehensive patient health monitoring programme
Required
(i) Suggest a set of quantitative measures which can be used to identify the effective level of achievement of each of the features listed.
(ii) Indicate how these measures could be combined into a single 'quality of care' measure.
【论述题】
The absence of the profit measure in non profit seeking organisations causes problems for the measurement of their efficiency and effectiveness.
Required
(i) Explain why the absence of the profit measure should be a cause of the problems referred to.
(ii) Explain how these problems extend to activities within business entities which have a profit motive. Support your answer with examples.
【论述题】
Compare and contrast the use of residual income and return on investment in divisionalperformance measurement, stating the advantages and disadvantages of each.
Division Y of Chardonnay currently has capital employed of $100,000 and earns an annual profit after depreciation of $18,000. The divisional manager is considering an investment of $10,000 in an asset which will have a ten-year life with no residual value and will earn a constant annual profit after depreciation of $1,600. The cost of capital is 15%.
Calculate the following and comment on the results.
(i) The return on divisional investment before and after the new investment
(ii) The divisional residual income before and after the new investment
Explain the potential benefits of operating a transfer pricing system within a divisionalised company.
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