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Tutorial Document and Self Assessment Questions
Tutorial 1: Decentralisation and Financial Measures of Performance
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Aim
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To understand the important elements of effective management control systems To calculate ROI and RI of different division and interpret the result |
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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) |
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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 |
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Tutorial Activities and Questions |
Attempts Financial Performance Measures Question supplied below |
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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
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Sales revenue |
£,000 1080 |
£,000 666 |
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Variable costs |
414 |
374 |
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Contribution |
666 |
292 |
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Controllable overheads |
114 |
50 |
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Controllable profit |
552 |
242 |
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Apportioned central costs |
405 |
216 |
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Net profit before tax |
147 |
26 |
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Divisional fixed assets: |
£m |
£m |
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At original cost |
9.76 |
1.26 |
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At written down value |
5.22 |
1.12 |
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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