管理会计（第10版）课件汇麦克雷尼 第7-12章 Accounting for control-Managing working capital

Chapter7AccountingforcontrolManagementAccountingforDecisionMakersTenthEditionLEARNINGOUTCOMESYoushouldbeableto:UndertakevarianceanalysisanddiscusspossiblereasonsforthevariancescalculatedDiscusstheroleandlimitationsofbudgetsforperformanceevaluationandcontrolDiscusstheissuesthatshouldbetakenintoaccountwhendesigninganeffectivesystemofbudgetarycontrolExplainthenature,roleandlimitationsofstandardcostingDiscussthebehaviouralissuessurroundingusingbudgetsandvariancestomonitorperformancePreparebudgetsPerformandcollectinformationonactualperformanceIdentifyvariancesbetweenplanned(budgeted)andactualperformanceRespondtovariancesbetweenplannedandactualperformanceandexercisecontrolFigure7.1ThebudgetarycontrolprocessPreparebudgetCollectinformationonactualperformancePerformCompareactualperformancewithbudgetandtakeactionondeviationsAdjustAdjustFeedbackFigure7.2FeedbackcontrolPreparebudgetIdentifydeviationsbetweenbudgetandforecastactualoutcomePrepareforecastofactualoutcomeEvaluateresultsandtakeactionondeviationsAdjustAdjustFigure7.3FeedforwardcontrolFlexiblebudgetsAmorevalidcomparisoncanbemadebetweenthebudget(usingtheflexedfigures)andtheactualresults.Originalbudget Flexedbudget ActualOutput(productionandsales)1,000units

900units900units£ £ £Salesrevenue100,00090,00092,000Rawmaterials(40,000) (36,000)(36,000m)(36,900)(37,000m)Labour(20,000)(18,000)(2,250hr)(17,500)(2,150hr)Fixedoverheads

(20,000)(20,000)(20,700)Operatingprofit

20,00016,00016,900equalsminusActualprofitplusAlladversevariancesAllfavourablevariancesBudgetedprofitFigure7.4RelationshipbetweenthebudgetedandactualprofitSalesvariancesDifferencebetweenprofitshowninoriginalbudgetandprofitshowninfixedbudgetSalesvolume

varianceDifferencebetweenactualsalesandsalesshownintheflexedbudgetSalesprice

varianceFigure7.5SalesvariancesSalesvariancesforMaySalesvolumevarianceSalespricevarianceDifferencebetweenoriginalandflexedbudgetDifferencebetweenflexedbudgetandactualfigures£20,000−£16,000=£4,000(Adv)£90,000−£92,000=£2,000(Fav)MaterialsvariancesDifferencebetweenactualdirectmaterial

costanddirectmaterialcostaspertheflexedbudget(budgetedusagefortheactualoutput)

Total

directmaterial

varianceDirectmaterialusagevarianceDifferencebetweenactualamountofdirectmaterialsusedandamountasperflexedbudget(budgetedusageforactualoutput).MultipliedbythebudgeteddirectmaterialcostperunitDirectmaterialpricevarianceDifferencebetweenactualcostofthedirectmaterialusedanddirectmaterialcostallowed(actualquantityofmaterialusedatthebudgeteddirectmaterialcost)Figure7.6Total,usageandpricevariancesfordirectmaterialsforMayDirectmaterialsusagevarianceDirectmaterialspricevariance(37,000−36,000)×£1=£1,000(Adv)£36,900−£37,000=£100(Fav)Totaldirectmaterialsvariance

£1,000(Adv)−£100(Fav)=£900(Adv)Actualcostofmaterialsused−budgetedcost(Actualquantityused−budgetquantity)×budgetcostperunitLabourvariancesTotal

directlabour

varianceDirectlabourefficiencyvarianceDirectlabourratevarianceDifferencebetweenactualdirectlabourcostanddirectlabourcostaspertheflexedbudget(budgeteddirectlabourhoursfortheactualoutput)Differencebetweenactualdirectlabourhoursanddirectlabourhoursaspertheflexedbudget(budgeteddirectlabourhoursfortheactualoutput).MultipliedbythebudgeteddirectlabourrateperhourDifferencebetweenactualcostofdirectlabourhoursanddirectlabourcostallowed(actualdirectlabourhoursworkedatthebudgetedlabourrate)Figure7.7Total,efficiencyandratevariancesfordirectlabourforMayDirectlabourefficiencyvarianceDirectlabourratevariance(2,250−2,150)×£8=£800(Fav)£17,500−£17,200=£300(Adv)Totaldirectlabourvariance

£800(Fav)−£300(Adv)=£500(Fav)Actualcostofhoursworked−budgetedcostofhoursworked(Actualhoursworked−budgethours)×labourrateperhourFixedoverheads

spending

varianceDifferencebetweenactualfixedoverheadcostandfixedoverheadcostaspertheflexed(andtheoriginal)budgetFixedoverheadvarianceImportant

33%Moderatelyimportant

40%Notimportant

27%Figure7.8DegreeofimportanceattachedtoflexiblebudgetingSource:TakenfrominformationappearinginAbdel-Kader,M.andLuther,R.(2004)AnEmpiricalInvestigationoftheEvolutionofManagementAccountingPractices,Workingpaperno.04/06,UniversityofEssex,October.Source:TakenfrominformationappearinginAbdel-Kader,M.andLuther,R.(2004)AnEmpiricalInvestigationoftheEvolutionofManagementAccountingPractices,Workingpaperno.04/06,UniversityofEssex,October.Figure7.9Frequencyofuseofflexiblebudgets202515105044812345%2916231913301=Never

5=VeryoftenScaleFigure7.10ThecumulativevariancesforlabourefficiencyinmotorinsuranceclaimhandlingatIndisurersLtdFavourable(F)(£)0100200300400300200100800700600500Adverse(A)(£)JanFebMarAprMayJuneJulyAugSeptOctNovDecFigure7.11VarianceanalysisandbusinesssizeSource:FigureadaptedfromCIMA(2009)ManagementAccountingToolsforTodayandTomorrow,p.12.6040

20800%SmallMediumLargeVerylarge<50employees50–250employees250–10,000employees>10,000employeesSettingstandardsHowisinformationgathered?Whosetsthestandards?Whatkindofstandardsshouldbeused?TwotypesofstandardsPracticalstandardsIdealstandardsTimetakenperunitofoutputCumulativeunitsofoutputFigure7.12Thelearning-curveeffectProblemswithapplyingstandardcostingtechniquesFactorsbeyondthecontrolofthemanagermayaffectavarianceStandardscanquicklybecomeoutdatedDifficulttodemarcatemanagementresponsibilitiesNoincentivetoachievebeyondthestandardStandardsmaycreateperverseincentivesSource:FigureadaptedfromCIMA(2009)ManagementAccountingToolsforTodayandTomorrow,p.12.Figure7.13Standardcostingandbusinesssize4530

15600%SmallMediumLargeVerylarge<50employees50–250employees251–10,000employees>10,000employeesMaterialsOverheads

Labour%2510075500(100%)30(87%)2620(67%)StandardsusedFigure7.14ThepopularityofstandardsinpracticeSource:FigurebasedoninformationinDugdale,D.,Jones,C.andGreen,S.(2006)ContemporaryManagementAccountingPracticesinUKManufacturing,CIMAResearchPublication,Vol.1,Number13.MakingbudgetarycontroleffectiveCleardemarcationbetweenareasofmanagerialresponsibilityBudgettargetsthatarechallengingyetachievableSeriousattitudetakentothesystemReportsaimedatindividualmanagersFairlyshortreportingperiodsEstablisheddatacollection,analysisandreportingroutinesTimelyvariancereportsActiontakentogetoperationsbackundercontrolBehaviouralissuesofbudgetarycontrolDemanding,yetachievable,budgettargetscanmotivatemorethanlessdemandingonesUnrealisticallydemandingtargetscanadverselyeffectmanagers’performanceBudgetscanimprovejobsatisfactionandperformanceParticipationofmanagersinsettingtheirtargetscanimprovemotivationandperformanceFigure7.15RelationshipbetweenthelevelofperformanceandtheperceiveddegreeofbudgetdifficultyOptimumlevelofdifficultyPerformanceDegreeofbudgetdifficultyDifficultEasyLowHighIndirectcontrolPersonnelcontrol

Self-controlthroughcarefulselectionofemployeesandtheirtrainingCulturalcontrol

ControlthroughabusinessculturethatencouragesappropriateactionsResults(oroutput)control

Post-performancecomparisonofactualoutcomewithplannedActioncontrolPhysicalobservationand/orrestrictingauthorisationDirectcontrolExercisingcontrolFigure7.16DifferentapproachestoexercisingcontrolChapter8MakingcapitalinvestmentdecisionsManagementAccountingforDecisionMakersTenthEditionLEARNINGOUTCOMESYoushouldbeableto:IdentifyandevaluatethefourmaininvestmentappraisalmethodsfoundinpracticeExplainthenatureandimportanceofinvestmentdecisionmakingExplainthemethodsusedtomonitorandcontrolinvestmentprojectsDiscussthepopularityanduseofthefourmaininvestmentappraisalmethodsinpracticeThenatureofinvestmentdecisionsLargeamountsofresourcesareofteninvolvedItisoftendifficultand/orexpensivetobailoutofaninvestmentonceundertakenThescaleofinvestmentbyUKbusinessesBusiness Expenditureonadditionalnon-current assetsasapercentageof: Profitfor End-of-year

theyearnon-currentassetsVodafoneplc(telecommunications) 293 8RyanairHoldingsplc(airline) 10118SevernTrentWaterplc(waterandsewerage) 2517JDWetherspoonplc(puboperator) 173 8MarksandSpencerplc(stores) 1,2006Skyplc(television)

145

9Go-AheadGroupplc(transport) 13619WmMorrisonSupermarketsplc(supermarkets) 161 6Source:Annualreportsofthebusinessesconcernedforthefinancialyearsendingin2018.InvestmentappraisalmethodsFourmethodsofevaluationAccountingrateofreturn(ARR)Paybackperiod(PP)Netpresentvalue(NPV)Internalrateofreturn(IRR)Accountingrateofreturn(ARR)AverageannualprofitAverageinvestmenttoearnthatprofit

ARR=

×100%ARRdecisionruleWherecompetingprojectsexceedtheminimumrate,theonewiththehighestARRshouldbeselectedForaprojecttobeacceptable,itmustachieveatleastaminimumtargetARRProblemswithARRIgnoresthetimingofcashflowsUseofaverageinvestmentUseofaccountingprofitCompetinginvestmentsPaybackperiod(PP)Paybackperiod(PP)TimetakenforinitialinvestmenttoberepaidoutofprojectnetcashinflowsPPdecisionruleIfcompetingprojectshavepaybackperiodsshorterthanmaximumpaybackperiod,theonewiththeshortestpaybackperiodisselectedProjectshouldhaveashorterpaybackperiodthantherequiredmaximumpaybackperiodProblemswithPPDoesnottaketimingofcashflowsfullyintoaccountIgnorescashflowsafterPPDoesnottakeriskfullyintoaccountNotrelatedtowealthmaximisationobjectiveArbitrarilydeterminedtargetpaybackperiodFigure8.1ThecumulativecashflowsofeachprojectinActivity8.6Project1Project3Project2Yr1Cashflows(£000)2008006004009000500300100700Y2Yr3Yr1Yr2Yr1Yr2Yr3Yr4Yr5Y1PaybackperiodInitialoutlayYr3Yr4Yr5Y5Y4NPVinvestmentappraisalmethodMakesalogicalallowanceforthetimingofthosecashflowsConsidersallofthecashflowsforeachinvestmentopportunitySource:Atrill,P.andMcLaney,E.(2009)AccountinganIntroduction,5thedn,PearsonEducation.Figure8.2FactorsinfluencingthereturnrequiredbyinvestorsfromaprojectThepresentvalueofacashflowPVofthecashflowofyearn=actualcashflowofyearndividedby(1+r)nNetpresentvalue(NPV)decisionruleIfcompetingprojectshavepositiveNPVs,theonewiththehighestNPVisselectedIfprojectNPVispositive,itshouldbeaccepted;ifitisnegative,itshouldberejectedFigure8.3Presentvalueof£1receivableatvarioustimesinthefuture,assuminganannualfinancingcostof20percent065432178910Yearsintothefuture102030405060708090100Pence£1WhyNPVisbetterthanARRandPPThewholeoftherelevantcashflowsTheobjectivesofthebusinessThetimingofthecashflowsNPVfullyaddresseseachofthefollowing:Internalrateofreturn(IRR)Internalrateofreturn(IRR)Thediscountrate,which,whenappliedtothefutureprojectcashflows,producesazeroNPVIRRdecisionruleIfcompetingprojectsexceedminimumIRRrequirement,theonewiththehighestIRRisselectedProjectmustmeetaminimumIRRrequirement

(theopportunitycostoffinance)Figure8.4TherelationshipbetweentheNPVandIRRmethodsNPV(£000)Costofcapital(%)10203040506070010203040IRR−10ProblemswithIRRDoesnotdirectlyaddresswealthmaximisationIgnoresthescaleofinvestmentHasdifficultywithunconventionalcashflowsSomepracticalpointsrelatedtoinvestmentappraisalPastcostsCommonfuturecostsOpportunitycostsTaxationYear-endassumptionsCashflowsnotprofitflowsInterestpaymentsOtherfactorsSource:AdaptedfromAtrill,P.andMcLaney,E.(2013)AccountingandFinanceforNon-Specialists,8thedn,PearsonEducation.Figure8.5ThemaininvestmentappraisalmethodsInvestmentappraisalinpracticeManysurveyshaveshownthefollowingfeatures:NPVandIRRhavebecomeincreasinglypopularContinuedpopularityofthePPandARRmethodsBusinessestendtousemorethanonemethodLargerbusinessesrelymoreheavilyonNPVandIRRthansmallerbusinessesAmultinationalsurveyofbusinesspracticeUSUKGermanyCanadaJapanAverageIRR4.004.164.084.153.293.93NPV3.884.003.504.093.573.80Payback

period3.463.893.333.573.523.55Responsescale1=Never,2=Rarely,3=Often,4=Mostly,5=AlwaysFigure8.6ManagingtheinvestmentdecisionStage1Stage2Stage3Stage4Stage5DetermineinvestmentfundsavailableIdentifyprofitableprojectopportunitiesEvaluatethe

proposedprojectApprovetheprojectMonitorandcontrol

theprojectSource:AdaptedfromfigureinCIMA(2009)ManagementAccountingToolsforTodayandTomorrow,CIMA,July,p.18.Figure8.7Post-completionauditsChapter9ManagingriskManagementAccountingforDecisionMakersTenthEditionLEARNINGOUTCOMESYoushouldbeableto:IdentifyandevaluatethemostpopularapproachestoriskassessmentfoundinpracticeExplainthenatureofriskandtheimportanceofconsideringriskwhenmakingdecisionsDiscussthepopularityanduseofthevariousapproachestoriskassessmentfoundinpracticeExplainhowtheoutcomesfromassessingriskcanbeusedRiskandinvestmentdecisionsRelativelylongtimescalesareinvolvedLargescalefundsareofteninvolvedMethodsofdealingwithriskininvestmentappraisalScenarioanalysisExpectedvaluesSensitivityanalysisRisk-adjusteddiscountrateOperatingcostsProjectNPVFinancingcostInitialoutlaySalespriceAnnualsalesvolumeProjectlifeFigure9.1FactorsaffectingthesensitivityofNPVcalculationsFigure9.2ThesensitivityanalysisprocessIdentifythebestestimateforeachinputfactorDerivetheNPV(orotherresult)usingthoseestimatesTakejustonefactorandalteritsvalue,inanegativedirection,untiltheNPV(orotherresult)iszeroRepeatthepreviousstepforeachinputfactorAssessthevulnerabilityoftheprojecttothepossibilitythattheactualvalueforeachinputfactorwillvaryfromitsbestestimateConsiderthelevelofconfidencethatthemoreriskyfactorsmightcausetheprojecttofailMakeadecisiontakingaccountoftheNPV(orotherresult)andperceivedrisk,basedonthesensitivityanalysisFigure9.3NPVsensitivityanalysisoftheMinadoBarrosolithiumprojectSource:SavannahResourcesplc(2018)ScopingStudyfortheMinadoBarrosoLithiumProjectDeliversNPVofUS$356mSolidBasistoFastTracktheProjecttoaFeasibilityStudy,Figure9,p.23.Cashflow

(amongstotherssales,EBITDA,

EBIT)17%40%15%Costofcapital(includingsustainablegrowthrate)28%Both,cashflow

andcostofcapitalNosensitivitiesFigure9.4ConsiderationofsensitivitiesSource:AdaptedfromCostofCapitalStudy2018,KPMG,Figure6,p.11,2018.https://assets.kpmg/content/dam/kpmg/ch/pdf/cost-of-capital-study-2018.pdf

Cashflows(a)Probability(b)Expectedcashflows(a

b)

£

£Option1800,0000.6480,000Option2120,0000.112,000Option3400,0000.3120,000Expectednet

cashflowsineachyear

612,000ENPVapproachFigure9.5ThedifferentpossibleprojectoutcomesfortheZetaproject(Example9.3)Outcome1Outcome2Outcome3Outcome4Year1(0.6)Year2(0.6)Year1(0.4)Year2(0.4)Year1(0.4)Year2(0.6)Year1(0.6)Year2(0.4)80,00080,00080,000120,000120,000120,00080,000120,000Cashflow

£0.6×0.6=0.360.4×0.4=0.160.4×0.6=0.240.6×0.4=0.24ProbabilityTotal1.00AssigningprobabilitiesObjectiveprobabilitiesSubjectiveprobabilitiesReturn(%)RiskRisk-freerateRiskpremiumFigure9.6RelationshipbetweenriskandreturnChapter10Strategicmanagementaccounting:PerformanceevaluationandpricinginacompetitiveenvironmentManagementAccountingforDecisionMakersTenthEditionLEARNINGOUTCOMESYoushouldbeableto:Discusstheroleofnon-financialmeasuresofperformanceinmanagementaccountinganddescribehowthebalancedscorecardattemptstointegratebothfinancialandnon-financialmeasuresDiscussthenatureofstrategicmanagementaccountinganddescribeitsroleinprovidinginformationaboutcompetitorsandcustomersExplaintheterm‘shareholdervalue’anddescribetheroleofEVA®inmeasuringanddeliveringshareholdervalueLEARNINGOUTCOMES(Continued)Youshouldalsobeableto:ExplainthetheoreticalunderpinningofpricingdecisionsanddiscussthepracticalissuesinvolvedindetermininganappropriatesellingpricefortheoutputofabusinessThestrategicplanningframeworkStep1Step2Step3Step4Step5Establishmission,visionandobjectivesUndertakeapositionanalysisIdentifyandassessthestrategicoptionsSelectstrategicoptionsandformulateplansPerformreviewandcontrolStrategicmanagementaccountingTosupportthestrategicplanningprocess,managementaccountingmustbecomemoreconcernedwith:TheexternalenvironmentDevelopingmethodstohelpoutperformcompetitorsMonitoringandsuccessfullyimplementingbusinessstrategiesCompetitorprofilingCompetitorarrayCompetitoranalysisFigure10.1FrameworkforcompetitoranalysisResourcesandcapabilitiesHowseriousisthethreat?AssumptionsWhatisthecompetitor’sviewoftheworld?StrategiesHowwillitgetthere?MissionandobjectivesWhereisthecompetitorgoing?Thecompetitor’slikely

actionsCustomer-relatedcostsOrderhandlingVisitingcustomerDelivering

tocustomerHoldinginventoriesforcustomerGrantingcreditAfter-salessupportFigure10.2Customer-relatedcostsAnalysingcustomerprofitabilityCustomerAplcBplcCplc%%%Grossprofit

100.0

100.0100.0Generalsellingandadministrativecosts50.047.850.0Customer-relatedcostsOrderhandling10.58.78.3Invoicingandcollection10.58.78.3Shipmentprocessing15.817.416.7Salesvisits18.44.34.2After-salesservice15.8

–4.2Profit/(loss)forthemonth

(21.0)

13.08.3

100.0

100.0100.0Figure10.3TrendanalysisforAplc05102015Jan15.818.45010.550AprMarFebJulyJuneMayOctSepAugDecNov%ofgrossprofitGeneralsellingandadministrativecostsSalesvisitsShipmentprocessingAfter-salesservicesOrderhandlingInvoicingSource:AdaptedfromfigureinCIMA(2009)ManagementAccountingToolsforTodayandTomorrow,p.17.Figure10.4Useofcustomerprofitabilityanalysis453015600%<50employees50–250employees250–10,000employees>10,000employeesSmallMediumLargeVerylargeOverallFigure10.5AnnualcostreductiontargetsSource:Deloitte(2016)ThrivinginUncertainty:CostImprovementPracticesandTrendsintheFortune1000,www2.D,April.Figure10.6SuccessinmeetingcosttargetsFigure10.7Thebalancedscorecard–fortranslating

astrategyintooperationalprocessesFigure10.8Thecause-and-effectrelationshipInvestmentinstaffdevelopmentImprovementinlevelofafter-salesserviceIncreaseincustomersatisfactionIncreaseinsalesandprofitsFinancialInternalbusinessprocessCustomerLearningandgrowthFigure10.9Useof(andsatisfactionwith)thebalancedscorecardSource:Rigby,D.(2015)InsightsManagementTools,BalancedScorecard,BainandCompany,/publications/articles/management-tools-balanced-scorecard.aspx,10June,usedwithpermissionfromBain&Company.Figure10.10Thefour-stageprocessforcreatingshareholdervalueSelectanappropriatemeasureofshareholderreturnGenerateshareholderreturnsthroughfocusedmanagementMeasureshareholderreturnstoseewhether

theobjectivesarebeingachievedSetobjectivesthatrecognisethesupremacyofshareholders

ProblemswithaccountingprofitDoesnottakefullaccountofcostofcapitalinvestedCanvaryaccordingtoaccountingpolicieschosenIgnoresriskMeasuredoverashorttimeperiodEconomicvalueadded(EVA®)EVA®

=NOPAT−(R×C)

Where:NOPAT=netoperatingprofitaftertaxR=requiredreturnsofinvestorsC=capitalinvested(thenet

assetsofthebusiness)EVA®CommonadjustmentsR&DcostsRestructuringcostsMarketableinvestmentsIntroducingnewtechniquesPotentialproblemsAssumptionthatotherswillshareenthusiasmfornewtechniqueFailuretorecognisetherewillbewinnersandlosersExcessiveoptimismoverresultstobeachievedFigure10.11GraphofquantitydemandedagainstpriceforCommodityAPriceperunit(£)Quantity(units)Q2Q1P2P10Figure10.12Graphofquantitydemandedagainstprice

forCommodityBPriceperunit(£)Quantity(units)Q2Q1P2P10Cost

(£)Quantity(units)Figure10.13Graphoftotalcostagainstquantity(volume)ofoutputofServiceXSalesrevenue(£)Quantity(units)Figure10.14Graphoftotalsalesrevenueagainstquantity(volume)soldofServiceXFigure10.15Graphoftotalsalesrevenueandtotalcostagainstquantity(volume)ofoutputofServiceXRevenue/Cost(£)Quantity(units)TotalcostOptimumlevelofsalesTotalsalesrevenueMaximumprofitFigure10.16TotalcostandtotalrevenueforServiceY

Totalsalesrevenueandtotalcost(£)04000300020001000500028645317910UnitsofServiceYTotalcostTotalsalesrevenue6000Cost-pluspricingMaybeappropriateforpricemakersOftenlessrelevanttopricetakersSource:AdaptedfromCIMA(2009)ManagementAccountingToolsforTodayandTomorrow,p.13.Figure10.17Theuseofpenetrationpricing2015300%SmallMediumLargeVerylarge<50employees50–250employees251–10,000employees>10,000employees25510Source:AdaptedfromCIMA(2009)ManagementAccountingToolsforTodayandTomorrow,p.13.Figure10.18Theuseofpriceskimming10

5150%SmallMediumLargeVerylarge<50employees50–250employees251–10,000employees>10,000employeesChapter11MeasuringdivisionalperformanceManagementAccountingforDecisionMakersTenthEditionLEARNINGOUTCOMESYoushouldbeableto:IdentifythemajormethodsofmeasuringtheperformanceofoperatingdivisionsanddivisionalmanagersandassesstheusefulnessofsuchmethodsDiscussthepotentialadvantagesanddisadvantagesforabusinessofadoptingadivisionalstructureExplaintheincreasingimportanceofnon-financialmeasuresinmanagingabusinessandhowtheymaybeusedfordecision-makingpurposesDescribetheproblemsofdeterminingtransferpricesbetweendivisionsandoutlinethemethodsusedinpracticeTypesofresponsibilitycentresInvestmentcentresProfitcentresCostcentresSavillsplcSavillsNorthAmericaSavillsUKSavillsEuropeSavillsAsiaPacificSavillsInvestmentManagementSource:Savillsplc,savills.co.uk,accessed26October2016.Figure11.1TheorganisationalchartforSavillsplcFigure11.2AdvantagesofdivisionalisationManagementdevelopmentAdvantages

of

divisionalisationManagementmotivationStrategicrolefortopmanagersSpecialistknowledgeExploitingmarketinformationTimelydecisionsCompetitionbetweendivisions

Management‘perks’

Increasingcosts

Goal

conflict

Riskavoidance

DisadvantagesofdivisionalisationFigure11.3DisadvantagesofdivisionalisationHouseholdappliancesdivisionalincomestatementforlastyear£m980(490)490(130)360(150)210

(80)130

Variableexpenses

ContributionControllabledivisionalfixedexpenses Controllableprofit

Non-controllabledivisionalfixedexpenses

DivisionalprofitbeforecommonexpensesApportionedcostofcommonexpensesDivisionalprofitfortheperiodSalesrevenueSource:Drury,C.andEl-Shishini,E.(2005)DivisionalPerformanceMeasurement:AnExaminationofPotentialExplanatoryFactors,CIMAResearchReport,August,p.32.405030201004480–56–1011–1516–2021–25Frequency%26–3030+Costofcommonresourcesasa%ofdivisionalsales44.429.118.84.30.90.91.7Figure11.4Commoncostsasapercentageofdivisional

annualsalesrevenueReturnoninvestment(ROI)ROI=

DivisionalprofitDivisionalinvestment(assetsemployed)

×100%multipliedbyequalsReturnoninvestmentDivisionalprofit

DivisionalsalesrevenueDivisionalsalesrevenue

DivisionalinvestmentFigure11.5ThemainelementsoftheRIratioResidualincomeAdivisionproducedaprofitof£100,000andtherewasadivisionalinvestmentof£600,000withacostoffinancingthisinvestmentof15percentayear.£Divisionalprofit100,000Chargeforcapitalinvested

(15%×£600,000)

(90,000)Residualincome

10,000ComparingperformanceSimilarbusinesseswithinthesameindustryPreviousperformanceofthedivisionOtherdivisionswithinthebusinessBudget(target)performanceSomebasesforcomparisonDivisionalperformancemeasurementusingEVA®

EVA®

=NOPAT−(R×C)

Where:NOPAT=netoperatingprofitaftertaxR=requiredreturnsofinvestors

(thatis,costoffinancing)C=capitalinvested

(thatis,thenetassets)AssessmentofperformanceObjectivesoftransferpricingOptimising