Professional Level – Options Module, Paper P5 Advanced Performance Management
1 (a) To: Finance Director From: A Accountant
Date: June 2011
Subject: Divisional performance issues at JHK and the introduction of a new information system
June 2011 Answers
This report examines recent divisional performance issues. It begins by evaluating the performance of each division and offering a general consideration of the different measures of divisional performance.
The nature of transfer prices and suitable methods of transfer pricing the work of the service division back into the main manufacturing and sales division are reviewed. Finally, the impact of a unified corporate database and improved ...view middle of the document...
ROI is a simple, commonly used measure of divisional performance. However, it can encourage divisions to delay investment in new assets since this measure improves as assets are depreciated with age. RI offers the possibility of applying different costs of capital to divisions with different risk profiles. However, RI does not allow a clear comparison of performance between divisions since it is an absolute measure of performance.
Both ROI and RI have the disadvantage of being based on profit measures of performance rather than cash. Measures such as NPV use cash flows which are less subject to the interpretation of accounting rules and are more directly aligned with shareholder interests.
It is unclear that either of these measures will align with the overall performance measure of TSR, since it depends on share price and dividends paid.
EVATM is an absolute performance measure like RI. It involves a more complex calculation than RI with many adjustments to the accounting figures of profit and net assets, such as the use of replacement costs for asset...