• Unit 9: Performance Evaluation

    This unit describes how businesses use managerial accounting to evaluate company performance for the entire company, organizational departments, and 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. It often bases the compensation given to managers on the financial performance of the divisions they manage. We will consider the issues Game Products encounters when it evaluates the performance of three divisional managers who oversee sporting goods, board games, and computer games.

    Completing this unit should take you approximately 3 hours.

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

      • define decentralized organization and explain advantages and disadvantages of decentralizing;
      • differentiate among the three types of responsibility centers;
      • explain responsibility accounting and why it is useful for a decentralized organization;
      • calculate and interpret segmented net income to evaluate performance;
      • calculate and interpret return on investment (ROI) to evaluate performance; and
      • calculate and interpret residual income (RI) to evaluate performance.

    • 9.1: Control Operations in Decentralized Organizations

      • Using Decentralized Organizations to Control Operations URL

        Read the introduction and section 11.1. Game Products, Inc. has experienced significant growth in volume, market area, and products. It operates internationally and has three broad product lines that make board games, computer games, and sporting goods. Games Inc. has three distinct marketing areas and three distinct product lines. Management has decided to decentralize its operations and needs to revamp its management information system to provide relevant and timely information about product lines in different locations. Decentralization has pros and cons.

    • 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: Evaluating Investment Centers

      • Comparing Segmented Income for Investment Centers URL

        The starting point for evaluating investment centers for the president of Games Products Inc. is to review 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. Still, as you will see, there are limitations to using only this method.

      • 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.

      • 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.

    • 9.4: Wrap-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.

    • Unit 9 Assessment

      • Unit 9 Assessment Quiz

        Take this assessment to see how well you understood this unit.

        • This assessment does not count towards your grade. It is just for practice!
        • You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
        • You can take this assessment as many times as you want, whenever you want.

    • Unit 9 Conclusion

      In this unit, you learned how to apply management accounting techniques to decentralized organizations. The main focus was on evaluating investment centers using techniques like the development of a segmented income statement, and applying performance metrics to these segmented accounts. In the next unit, you learn how to prepare a cash flow, one of the most vital management accounting tools.