Albrecht 19.pdf - Marriott School

76154_23_ch19_p942-1006.qxd 3/1/07 3:35 PM Page 964
964 Part 6 Control in a Management Accounting System
R E M E M B E R T H I S . . .
• Profit centers and their managers are usually evaluated on both costs and
revenues.
• The most common profit center measurement tool is the segment margin statement.
This statement identifies both direct and indirect costs and charges only
the direct costs to segments.
• Costs in profit centers are analyzed and managed the same way they are in cost
centers—using standard costing. But because profit center managers are also
held responsible for revenues, actual and expected revenues are used to compute
sales price variances and sales volume variances.
• The formula for the sales price variance is:
(Actual price Standard price) Actual quantity sold.
• The formula for the sales volume variance is:
(Actual quantity sold Expected quantity sold) Standard price.
Use ROI and residual
income analysis to
explain how
performance is
controlled in
investment centers.
return on
investment (ROI)
A measure of operating
performance and efficiency
in utilizing assets;
computed in its simplest
form by dividing operating
profit by average total
assets.
4
Evaluating Performance
in Investment Centers
An investment center was defined earlier as an organizational unit in which a manager
has responsibility for costs, revenues, and assets. Overall, companies are considered
to be investment centers, as are some independent segments of
decentralized companies. For example, the Acme Computer and Edison Automobile
subsidiaries of IMC (see Exhibit 1) would probably both be investment centers.
Officers of such segments are responsible for acquiring and managing the assets required
to manufacture and market their products, as well as for managing the revenues
and costs related to those products. The assets include inventory, accounts
receivable, and long-term operating assets such as equipment and delivery trucks. On the
other hand, Edison’s Japan Operations could be considered a profit center if all asset management
decisions are handled by Far East operations. (If Japan Operations handles its own
asset management decisions, then it would be an investment center.) Further, the
Manufacturing center for Japan Operations is likely a cost center since it doesn’t control sales.
The bottom line is that when a segment essentially operates as a separate company
with responsibility for all of its assets, then it is considered to be an investment center.
There are several methods of evaluating the performance of an investment center. Two
of the most common methods used are the rate of return on invested assets and the residual
income.
Return on Investment (ROI)
You may recall that we introduced management accounting in Chapter 15 by describing
how the management team at DuPont used return on investment
(ROI) (sometimes called return on total assets) to manage their company to success
in the early 1900s. ROI is a measure of how much has been earned on the
assets of a company; it is equal to operating profit divided by total assets. For example,
if a company earned $1,000 on $10,000 of assets 5 for one year, its ROI
would be $1,000 $10,000, or 10%.
5 In this chapter, we will use the term ROI instead of return on total assets because it is more commonly used in management
decision making. In this text we will use average total assets instead of ending total assets to calculate ROI (although
in actual practice, management teams in some organizations may choose to use ending total assets). Average total assets is
generally computed by adding the assets balances at the beginning and end of the year, and then dividing the sum in half.