Management

Chapter 13

After completing this chapter, you should be able to:

1

2

calculate an investment centre’s return on investment (ROI), and residual income;

3

explain how to minimise the negative behavioural incentives associated with using return

on investment to evaluate performance;

4

calculate residual income (RI) for an investment centre, and describe some advantages

and disadvantages of using RI to evaluate performance;

5

understand the various definitions of invested capital and assets and use these to

calculate return on investment and residual income;

6

7

understand the concept of value-based management;

8

understand market value added (MVA) and shareholder value added (SVA) as measures of

investment centre performance;

9

understand how reward systems can be designed and used to enhance motivation and

individual performance;

describe some advantages and limitations of both ROI and residual income as

performance measures;

evaluate and calculate economic value added (EVA®) as a measure of investment centre

performance;

10

understand the different forms of performance-related reward systems used in

organisations;

11

understand the advantages and disadvantages associated with group versus individual

rewards; and

12

understand the importance of the timing of payment of rewards on motivation.

LEARNING OBJECTIVES

Financial performance

measures for strategic

business units, and

reward systems

2

PA R T 3 • I N F O R M AT I O N

FOR

MANAGING RESOURCES

I

n Chapter 12, we introduced decentralisation and responsibility accounting, and examined the nature of

financial performance reports for responsibility accounting units. In this chapter, we will extend that

discussion by looking financial performance measures used in investment centres. That is, we will

consider the advantages and disadvantages of measuring financial performance using return on investment

(ROI),...