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BAAC 221 Chapter 10
Performance Evaluation
| Term | Definition |
|---|---|
| Decentralize | Companies split their operations into different operating segments |
| Goal Congruence | when the goals of the segment managers align with the goals of the top management |
| Responsibility Center | a part of an organization in which managers are responsible for generating revenue |
| Responsibility Accounting | a system for evaluating the performance of each responsibility center and the manager |
| Cost Center | a responsibility center in which mangers are responsible for controlling costs |
| Revenue Center | Responsibility center in which managers are responsible for generating revenue |
| Investment Center | A responsibility center in which managers are responsible for generating revenues, controlling costs, and efficiently managing the divisions assets. |
| Performance Report | reports that compare actual results against budgeted figures |
| Variance | the difference between actual amount and the budget |
| favorable variance | a variance that causes operating income to be higher than budgeted |
| unfavorable variance | a variance that causes operating income to be lower than budgeted |
| management by exception | a management technique in which managers only investigate budget variances that are relatively large |
| direct fixed expenses | fixed expenses that can be traced to the segment |
| common fixed expenses | fixed expenses that cannot be traced to the segment. Rather these are fixed expenses incurred by a higher level segment that have been allocated to the underlying segments |
| segment margin | the operating income generated by a profit or investment center before subtracting the common fixed costs that have been allocated by the center |
| Return on investment | Operating Income/ Total Assets Measure the profitability of a division relative to the size of its assets |
| Sales margin | Operating Income/ Sales Revenue Shows how much income is generated for every dollar of sales |
| Capital turnover | Sales Revenue / Total Assets How much sales revenue is generated with every dollar of assets |
| Residual income | RI = Operating Income - (Target Rate of Return * total assets) Shows whether the division is earning income above or below management's expectations |
| gross book value | historical cost of assets |
| net book value | historical cost of assets minus accumulated depreciation |
| transfer price | the price charged for a product between two different divisions of the same company |
| Vertical integration | the practice of purchasing other companies within one's supply chain, notion that company's profits can be maximized by owning one's supplier |
| flexible budget | a summarized budget prepared for different levels of volume |
| master budget variance | the difference between actual results and the master budget |
| volume variance | the difference between the master budget and the flexible budget. Arises only because the volume actually sold differs from the volume originally anticipated in the master budget |
| flexible budget variance | the difference between the flexible budget and the actual results. Due to something other than volume |
| lag indicators | performance indicators that reveal the results of past actions and decisions |
| lead indicators | performance indicators that predict future performance |
| balanced scorecard | a performance evaluation system by Kaplan and Norton that integrates financial and operational performance measures along four perspectives: financial, customer, internal business and learning and growth |
| Key Performance Indicators (KPIs) | Summary performance metrics that allow managers to assess how well the company's objectives are being met |
| Performance scorecard | a report displaying the measurement of KPIs as well as there short term and long term targets. Allows managers to visually monitor and focus on managing the company's key activities and strategies as well as business risks. |
| Profit Center | responsibility center in which managers are responsible for both costs and revenues and therefore profits. |
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