7.

Measuring and Controlling

Assets employed

Return on Investment

Economic value added

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Measuring assets employed

Cash
Receivables
Inventories
Working capital
Property, plant and equipments
Leased assets
Idle assets
Intangible assets
Non current liabilities

2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young

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Efficiency and Productivity

Elements of ROI
ROI = Operating Income Investment
ROI = Operating Income
Sales
Sales
Investment

ROI = Return on Sales Asset Turnover

= Efficiency Productivity

2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young

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Efficiency and Productivity

Elements of ROI
What is efficiency?
It is a measure of an organizations ability
to control costs.

Operations Efficiency = Standard Cost

Actual Cost

2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young

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Efficiency and Productivity

Elements of ROI
What is productivity?
It is a ratio of output to input.
In financial control, this is the ratio of sales
to investment.

2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young

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Assessing Return on Investment

Analyze trends.
Compare to competitors.
Decompose and compare to competitors.
Look for signals suggesting where there
might be problems.

2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young

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Using Economic Value Added

What is economic value added?
It is an investment criterion, previously
called residual income.

Economic Value Added = Income Capital charge

2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young

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Using Economic Value Added

EVA evaluates income relative to the level
of investment required to earn that income.
It motivates managers to do what they think
is necessary to make economic value added
as large as possible.

2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young

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Learning Objective

Identify the limitations

of financial controls.

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The Efficacy of Financial Control

What are some criticisms of financial control?
Information is delayed.
Information is highly aggregated.
Its measures are narrow and do not evaluate
how well the organization is doing in meeting
stakeholders requirements.
It is too focused on short-term results.

2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young

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The Efficacy of Financial Control

How should we interpret these facets of
financial control?
Financial control is an important tool in the
process of control.
Used properly, it provides crucial help in
assessing the organizations long-term
viability and identifying processes that need
improvement.

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