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Performance evaluation systems and ROI
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  • Course
  • Management economics
  • Institution
  • University Of Exeter (UoEX)

Performance evaluation systems and ROI: Explains performance evaluation systems, the advantages/ disadvantages. Discusses Divisional performance evaluation and ROI, including examples and analysis arguments.

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Document information

  • July 28, 2022
  • 2
  • 2021/2022
  • Class notes
  • Anna
  • All classes

Subjects

  • roi
  • exeter business
  • accounting
  • management
  • managerial accounting
  • second year module
  • performance evaluation systems and roi
  • uoe
  • divisional performance evaluation

Written for

  • University of Exeter (UoEX)
  • Unknown
  • Management economics
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Managerial Accounting 5.10.20



Performance evaluation systems and ROI


Performance evaluation systems

o Objective of the systems is to help the company implement the strategy
o Can ensure companies meet objectives
o Usually based on accounting measures of performance
- Readily available
- Easy to understand and evaluate

o Can alternatively use share price (market measures)
- But many factors affect share price
- Very volatile measure
- Unavailable for private companies


Return on investment (ROI)

- Earnings before interest expenses and taxes/assets employed
- ROI=Income/Invested capital (capital employed)
- Income: earnings before interest before depreciation
- If project ROI < average ROI of centre, project is rejected
- Managers can use this to evaluate new projects

- Income: $30,000 (Profit)
- Invested capital: $200,000 (Net assets)
30,000/200,000 = 15%

Disadvantages:
- Can lead to over/under investment because it can provide incentives to managers to reject
profitable projects (ROI lower than mean ROI may mean managers reject)
- Net income does not include value increases
- Companies may keep old assets in the books to make figures look better
- Accounting net income is conservative
- Total assets exclude intangible assets

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