• Unit 9: Performance Evaluation

    This unit describes how businesses use managerial accounting to evaluate company performance – for the entire company, their organizational departments, and their individual employees. How do you evaluate the productivity of each division manager in a decentralized company? How well does each division use the company's assets to create profits? Responsibility accounting assumes someone is responsible for every cost the company incurs. They often base the compensation they give their managers on the financial performance of the divisions they manage.

    Completing this unit should take you approximately 4 hours.

    • Upon successful completion of this unit, you will be able to:

      • explain the advantages and disadvantages of decentralizing an organization;
      • differentiate between the three types of responsibility centers commonly used to evaluate segments: cost centers, profit centers, and investment centers;
      • calculate segmented net income and interpret the results to evaluate the performance investment centers; and
      • calculate return on investment (ROI), residual income (RI), and extra value added (EVA) and interpret each to evaluate the performance investment centers.

    • 9.1: Control Operations in Decentralized Organizations

      • Using Decentralized Organizations to Control Operations URL

        Read the Chapter 11 Introduction, then click on "Next Section" to read Section 11.1. You'll read about Game Products, Inc., which has experienced significant growth in volume, market area and products. The company is now operating internationally and has three broad product lines: board games, computer game making, and sporting goods. Along with its three distinct product lines are three distinct marketing areas. Management decided to decentralize its operation, and needed to revamp its management information system to provide relevant and timely information about its different product lines in its different locations. Decentralization has both pros and cons, which you will read about here.

    • 9.2: Establishing Responsibility Centers

      • Maintaining Control over Decentralized Organizations URL

        Responsibility centers can be based on attributes such as sales regions, product lines, or services offered. In the case of Game Products Inc., there are three responsibility centers based on three product lines. The purpose of establishing responsibility centers within organizations is to hold managers responsible for only the assets, revenues, and costs they can control. The level of control a manager has will help determine the type of responsibility center used for each manager.

        With this approach, responsibility centers are allocated budgets, and their revenues and costs (variable and fixed) are tracked. Each center has a responsibility income statement. Responsibility center expenses are allocated to direct variable costs and direct fixed costs. The responsibility center contribution margin is determined by reducing revenue by variable costs. Subtracting allocated fixed costs from the contribution margin yields the responsibility margin.


    • 9.3: Segmented Income

      • Comparing Segmented Income for Investment Centers URL

        Read section 11.3. Games Inc. President's starting point for evaluating investment centers is with reviewing segmented income for each investment center (or division). Segmented income is segment revenues minus segment expenses. She is interested in the level of profit that each of the three divisions generates, and segmented income gives her this information. You will see, however, that there are limitations to using this method exclusively.

    • 9.4: Return on Investment

      • Using Return on Investment (ROI) to Evaluate Performance URL

        Games Products Inc. will also consider the return on investment (ROI) generated by each division as an evaluative metric. ROI is one of the most common measures of performance for managers responsible for investment centers. ROI is a basic measure, but the way it is calculated can vary between organizations.

    • 9.5: Residual Income

      • Using Residual Income (RI) to Evaluate Performance URL

        Residual income is another evaluative metric that Games Products Inc. can use. Residual income (RI) provides a measure of income that is available to the whole organization. A manager's goal is to increase her RI from year to year. Most organizations that use RI also use ROI. Using both measures has the benefit of comparing one division to another by using ROI and minimizes the conflict between company goals and division goals by using RI.

    • 9.6: Economic Value Added

      • Using Economic Value Added (EVA) to Evaluate Performance URL

        Read Section 11.6 to learn about the EVA method of evaluating a company's performance. By the time you're finished reading, you'll be able to explain the differences and similarities of EVA to the Residual Income approach.

    • 9.4: Game Products Inc. Warp-Up

      • Wrap-Up of Game Products Inc. URL

        Mandy Dwyer, the president of Games Products Inc., meets with her management accountant and goes over his work. They choose three metrics to control their decentralized divisional operation: net income, profit margin ratio, and ROI. Their final step is to integrate these performance measures with a compensation plan for their operations managers.