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Accounting Final Chap 9 - EWU
Chap 9 - EWU
59
Accounting
Undergraduate 3
12/11/2012

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Term
Decentralized Organization
Definition
Decision-making authority is spread throughout the organization rather than being confined to a few top executives.
Term
Strongly Decentralized Organizations
Definition
Lowest-level managers are empowered to make as many decisions as possible.
Term
Advantages of Decentralized Organization
Definition

-Delegating to lower-level managers, so top managers can concentrate on bigger issues.

-Lower level managers making the decisions put the decision making in the hands of those who tend to have the most detailed and up-to date info about day-to-day operations.

-By eliminating layers of decision making and approvals, organizations can respond more quickly to customers and to changes in the operating environment.

-Granting decision-making authority helps train lower-level managers for higher-level positions.

-Empowering lower-level managers to make decisions can increase their motivation and job satisfaction.

Term
Disadvantages of Decentralized Organizations
Definition

-Lower-level managers make decisions without fully understanding the big picture.

-It lower-level managers have objective that clash with the objective of the entire organization.

-Spending innovative ideas may be difficult.

Term
Responsibility Center
Definition
Manager has control over costs, but not over revenue or the use of investment funds.
Term
Example of Cost Centers
Definition

Accounting

Finance

General Administration

Legal

Personnel

Term
Cost Center
Definition
Managers have control over both costs and revenue, but not over the use of investment funds.
Term

Profit Center Managers

(Cost Center)

Definition
These managers are often evaluated by comparing actual profit to targeted or budgeted profit.
Term
Investment Center
Definition
Managers have control over cost revenue, and investments in operating assets.
Term
Investment Center Managers
Definition
These managers are often evaluated using return on investment (ROI) or residual income measures.
Term
Return on Investment
Definition
Net Operating Income / Average Operating Assets
Term
The higher a business segment's return on investment...
Definition
The greater the profit earned per dollar invested in the segment's operating assets.
Term
Net Operating Income
Definition
Income before interest and taxes and is sometimes referred to as EBIT (earnings before interest and taxes)
Term
Operating Assets
Definition
Includes cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes. 
Term
Examples that are NOT included in Operating Assets
Definition

Land held for future use

an investment in another company

a building rented to someone else

Term
Net Book Value
Definition
Acquistion Cost - Accumulated Depreciation
Term
Net Book Value
Definition
Most companies use this to calculate average operating assets.
Term
Drawbacks of using Net Book Value
Definition
An asset's net book value decreases over time as the accumulated depreciation increases. This decreases the denominator in the ROI calculation, thus increasing ROI.
Term
ROI
Definition
Margin x Turnover
Term
Margin
Definition
Net Operating Income / Sales
Term
Turnover
Definition
Sales / Average Operating Assets
Term
Margin
Definition
Improved by increasing selling prices, reducing operating expenses, or increasing unit sales. Increasing unit sales also increases the margin because of operating leverage.
Term
Criticisms of ROI
Definition

-Managers may not know how to increase ROI

-A balanced scorecard can provide concrete guidance to managers, making it more likely that their actions are consistent with the company's strategy and reducing the liklihood that they will boost short-run performance at the expense of long-term performance.

-A manager who is evaluated based on ROI may reject investment opportunities that are profitable for the whole company but would have a negative impact on the manager's performance evaluation.

Term
Residual Income Approach
Definition
An approach to measuring an investment center's performance. It is the net operating that an investment center earns above the minimum required return on its operating assets.
Term
Disadvantages of Residual Income Approach
Definition
This approach can't be used to compare the performance of divisions of different sizes. Larger divisions often have more residual income than smaller divisions, not necessarily because they are better managed but simply because they are bigger.
Term
Why Companies would switch to Residual Income Approach
Definition
The residual income approach encourages managers to make investments that are profitable for the entire company but that would be rejected by managers who are evaluated using the ROI formula.
Term
Residual Income
Definition
Net Operating Income - (Average Operating Assets x Minimum Required Rate of Return)
Term
Economic Value Added
Definition
An adaption of residual income that has been adopted by many companies.
Term
Economic Value Added Objective
Definition
To maximize the total amount of residual income or EVA, not to maximize ROI.
Term
What will a manager who is evaluated based on ROI do to a project whose rate of return is below the division's current ROI?
Definition
A manager should reject the project, even if the rate of return on the project is above the company's minimum required rate of return.
Term
Operating Performance Measures
Definition
While financial measures pick up the results of what people in the organization do, they do not measure what drives organizational performance.
Term
Delivery Cycle Time
Definition
The amount of time from when a customer order is received to when the completed order is shipped.
Term
What could be necessary for a companies survival?
Definition
Cutting the delivery cycle time may give a company a key competitive advantage.
Term

Throughput Time

(Manufacturing Cycle)

Definition
The amount of time required to turn raw materials into completed products.
Term
Throughput Time Process
Definition

Process Time

Inspection Time

Move Time

Queue Time

Term
Process Time
Definition
The amount of time work is actually done on the product.
Term
Process Time
Definition
Only one of the four activities of Throughout Time that actually adds value to the product.
Term
Inspection Time
Definition
The amount of time spent ensuring that the product is not defective.
Term
Move Time
Definition
The time required to move materials or partially completed products from workstation to workstation.
Term
Queue Time
Definition
The amount of time a product spends waiting to be worked on, to be moved, to be inspected, or to be shipped.
Term
Manufacturing Cycle Efficiency (MCE)
Definition
A calculation that puts a better perspective on Throughput Time.
Term
Manufacturing Cycle Efficiency (MCE)
Definition
This calculation is an effort to eliminate the non-value-added activities of inspecting, moving, and queuing. Some companies have reduced their throughput time to only a fraction of previous levels. This helps to reduce delivery time.
Term
Balance Scorecard
Definition
Consists of an integrated set of performance measures that are derived from and support a company's strategy. 
Term
Strategy
Definition
Essentially a theory about how to achieve the organization's goals.
Term
Example of Balanced Scorecard
Definition
Offer an Operational Excellence customer value proposition that has three key components - low ticket prices, convenience, and reliability.
Term
Performance Measures used in balanced scorecards tend to fall in the four groups:
Definition

1. Financial

2. Customer

3. Internal Business Processes

4. Learning and Growth

Term

Financial

(Balanced Scorecard)

Definition

-Appear at the top of the performance measures. Most companies exist to provide financial rewards to owners.

-Even non-profit orgs. must generate enough financial resources to stay in operation.

-These are not sufficient in themselves--they should be integrated with nonfinancial measures in a well-desined balance scorecard.

Term
Financial Measures
Definition
Lag indicators that report on the results of the past.
Term
Top Managers
Definition
Who is ordinarily responsible for the financial performance measures--not lower-level managers.
Term
Internal business Processes
Definition
What the company does in an attempt to satisfy customers.
Term
Why is Improving Business Processes necessary?
Definition
To improve customer satisfaction
Term
Why is Improving Customer Satisfaction is necessary?
Definition
To improve financial results.
Term
Improvement
Definition
The emphasis of Balanced Scorecard
Term
Managers should carefully select performance measures for their own company's balanced scorecard, keeping these points in mind:
Definition

1. The performance measures should allow the strategy of the company.

2. The performance measures should be understandable and controllable to a significant extent by those being evaluated.

3. The scorecard should not have too many performance measures. This can lead to a lack of focus and confusion.

Term
Personal Scorecard
Definition
This should consist of items the individual can personally influence that relate directly to the performance measures on the overall balanced scorecard. The performance measure on this should not be overly influenced by actions taken by other in the company or by events that are outside of the individual's control.
Term
If a scorecard is correctly constructed then,
Definition
The performance measures should be linked together on a cause-and-effect basis. Each link can then be read as a hypothesis in the form "If we improve this performance measure, then this other performance measure should also improve".
Term
Balance Scorecard Theory
Definition
How the company can take concrete actions to attain its desired outcomes.
Term
Advantages of Balanced Scorecard
Definition

-It continually test the theories underlying management's strategy.

-Managers focus on trends in the performance measures over time. The emphasis is on progress and improvement rather than on meeting any specific standard. 

-Without this feedback, the organization may drift on indefinitely with ineffective strategy based on faulty assumptions.

Term
Robert Kaplan and David Norton
Definition
The originators of the balanced scorecard concept point out, "Compansation is such a powerful lever that you have to be pretty confident that you have the right measures and have good data for the measures before making the link".
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