Document and Self Assessment Questions

Workshop 2 (Week commencing 15th February)

Document and Self Assessment Questions

Workshop 2: Decentralisation and Financial Measures of Performance

 

Aim

 

To understand the important elements of effective management control systems

To calculate ROI and RI of different division and interpret the result

   
 

Reading

1. Bhimani et al.  5th edition (Chapter  14, pg 473-476; chapter 18 pg 600-605 and Chapter 19)

6th edition (Chapter  14, pg 443-446; chapter 18 pg 560-565 and Chapter 19)

2.   Issues in Management Accounting (Chapter 12)

3. Drury, C. (2008). Cost and Management Accounting 6,7, or 8th edition (Supplied on canvas)

   
 

Self assessment (using the core text)

Complete the multiple choice questions for chapter 18 (on MCS) and chapter 19

 

Consider the end-of-chapter review questions for chapters 18 (on issues covered), and chapter 19

 

Attempt end-of-chapter exercise:

 

18.12 Decentralisation, goal congruence and responsibility

   
Tutorial

Activities

and

Questions

Attempts

Financial Performance Measures Question supplied below

   

 

Performance measures question

 

P and Q are two divisions of a large company. The divisions are treated as investment centres with considerable authority for decision making decentralised to division managers. Every month they prepare an operating statement to be submitted to the Head Office. Considerable emphasis is placed on financial performance of the divisions.

 

The monthly Operating Statement, providing indicative performance, and Balance Sheet extracts are shown below:

Division P                          Division Q

 

Sales revenue

£,000

1080

£,000

666

Variable costs 414 374
Contribution 666 292
Controllable overheads 114 50
Controllable profit 552 242
Apportioned central costs 405 216
Net profit before tax 147 26
Divisional fixed assets:  

£m

 

£m

At original cost 9.76 1.26
At written down value 5.22 1.12
Working capital 2.40 0.30

 

The company operates with a target return on capital of 15% per annum. At present the performance of each division and its management is assessed against this target using return on investment (ROI), based on assets at original cost plus working capital. The company applies straight line depreciation to fixed assets.

 

Required:

 

(a) Calculate the annualised ROI for divisions P and Q from the above data in line with their current practice. Briefly compare and comment on the performance of the two divisions.                                                                                                                           (15 marks)

(b) Compute the annualised ROI calculation and the annualised Residual Income (RI) value. In both cases use fixed assets based on their written down value. Comment on your observations.                                                                                                         (15 marks)

(c) A proposal is made to purchase, immediately, a new machine which would cost £1.2m, have a life of six years with no scrap value. There are annual cash savings of £300,000 promised from the new machine. Compute and comment on the impact this would be likely to have on the annual ROI and RI for each division as computed in (b) above.                                                                                                                                               (10 marks)

(d) Discuss the relative benefits and disadvantages of using measures such as either Return on Investment or Residual Income for managerial as well as organisational performance measurement. You should make reference to any other suitable performance measures you consider appropriate.

(10 marks)

Total 50 marks