Accounting Chapter 11 Notes
Accounting Chapter 11 Notes ACC 204
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This 3 page Class Notes was uploaded by Melanie Guerrero on Sunday April 24, 2016. The Class Notes belongs to ACC 204 at Pace University taught by James Hannon in Spring 2016. Since its upload, it has received 15 views. For similar materials see Managerial Accounting (20014) in Accounting at Pace University.
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Date Created: 04/24/16
Accounting Chapter 11 Notes Decentralized organization • decision-making authority is spread throughout the organization rather than being confined to a few top executives Responsibility center • used for any part of an organization whose manager has control over and is accountable for cost, profit, or investments o Cost center – has control over costs, but not over revenue or the use of investment funds o Profit center – has control over both costs and revenue, but not over the use of investment funds o Investment center – has control over cost, revenue, and investments in operating assets Return on Investment (ROI) • Defined as net operating income divided by average operating assets: ROI = Net Operating Income Average operating assets • Net operating income – income before interest and taxes and is sometimes referred to as EBIT (earnings before interest and taxes) • Operating assets – includes cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes ROI can be expressed in terms of margin and turnover: Ex: ROI = Margin × Turnover Margin = Net operating income Sales Turnover = Sales Average operating assets Residual Income • Net operating income that an investment center earns above the minimum required return on its operating assets Residual Income = Net operating income – (average operating assets × minimum required rate of return) Economic Value Added (EVA) • An adaptation of residual income that has been adopted by many companies • Under EVA, companies modify their accounting principles in various ways • When residual income or EVA is used to measure performance, the objective is to maximize the total amount of residual income or EVA, not to maximize ROI Delivery Cycle Time • The amount of time when a customer order is received to when the completed order is shipped Delivery cycle time = Wait time + Throughput time Throughput time • The amount of time required to turn raw materials into completed products Process time • The amount of time work is actually done on the product Inspection time • The amount of time spent ensuring that the product is not defective Queue time • The amount of time a product spends waiting to be worked on, to be moved, to be inspected, or to be shipped Throughput (manufacturing cycle) time = Process time + inspection time + move time + queue time Manufacturing Cycle Efficiency (MCE) • Process (value-added) time as a percentage of throughput time MCE = Value-added time (Process time) Throughput (manufacturing cycle) time Balanced Scorecard • Consists of an integrated set of performance measures that are derived from and support a company’s strategy • Strategy – essentially a theory about how to achieve the organization’s goals • Characteristics of a balanced scorecard o Financial o Internal business processes o Learning o Growth • If the balanced scorecard is correctly constructed, the performance measures should be linked together on a cause-and-effect basis • Incentive compensation for employees, such as bonuses, can and probably should, be tied to balanced scorecard performance measures
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