Summary
Summary Chapter 23: Performance Measurement
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Summary of 2 pages for the course Management Accounting 2 at Hanze (Chapter 23 summary)
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Performance Measurement, Compensation The required rate of return multiplied by the investment isthe imputed cost of the investment.
and Multinational Considerations The imputed cost of the investment is a cost recognized
in particular situations but not recorded in financial
Financial and Nonofficial Performance Measures accounting systems because it is an opportunity cost.
1. Financial perspective
2. Customer perspective RI = Income – (Required Rate of Return*Investment)
3. Internal-business process perspective
4. Learning and growth perspective
Economic Value Added
Step 1: choose performance measures that align with firm’s Economic value added (EVA®) is a variation of RI used by
financial goals many companies.3 It is calculated as follows:
Step 2: choose the details of each performance measure in
step 1 Economic value added (EVA) =
Step 3: choose a target level of performance and feedback 𝐴𝑓𝑡𝑒𝑟 − 𝑡𝑎𝑥 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒
mechanism for each performance measure in step 1 − [𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
∗ (𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠)]
Return on Investment: is an accounting measure of income
divided by an accounting measure of investment. That is, EVA substitutes the following numbers in the RI
calculation:
ROI =
𝐼𝑛𝑐𝑜𝑚𝑒 (𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒) 1. Income: After-tax operating income,
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 (𝑎𝑠𝑠𝑒𝑡𝑠) 2. Required rate of return: (After-tax) weighted-average
cost of capital, and
𝐼𝑛𝑐𝑜𝑚𝑒 (𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒) 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠
ROI = * 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 3. Investment: Total assets minus current liabilities
𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠
Return on investment is the most popular approach to Return on Sales: The income-to-revenues ratio (or sales ratio),
measure performance for two reasons: often called the return on sales (ROS), is a frequently used
1. It blends all the ingredients of profitability—revenues, financial performance measure (part of ROI)
costs, and investment—into a single percentage and
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒
2. it can be compared with the rate of return on ROS = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 (𝑆𝑎𝑙𝑒𝑠)
opportunities elsewhere, inside or outside the company
Comparing Performance Measures
Residual income (RI) is an accounting measure of income 1. Alternative time horizons: An important element in
minus a dollar amount for required return on an accounting designing accounting-based performance measures is
measure of investment. choosing the time horizon of the performance measures.
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