ACC513 Managerial Accounting

ACC513 Managerial Accounting Lesson 5 –Investment Center Performance Evaluation and Incentive Issues

Introduction

This lesson discusses concepts and methods of measuring performance and controlling activities in multidivision organizations. Return on investment (ROI) as a performance measure is interpreted. Further, divisional organizations engage in transfer pricing. These rules are introduced and the behavioral issues are analyzed. The economic consequences of multinational transfer prices are explained. There are incentive issues in allocating costs to divisions when measuring divisional performances. The contribution approach to divisional reporting improves management decisions. ROI is compared to economic value added.

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Students will explore issues in the design and use of management performance evaluation and incentive plans. We will focus on the need for different accounting information for different decisions. Key characteristics of divisional incentive compensation plans are explained. Finally, the nature of fraudulent financial reporting is explored in order to reduce the possibility of its occurrence

Lesson Learning Objectives

By the conclusion of this Lesson you should be able to:

  • Demonstrate the benefits and disadvantages of decentralization.
  • Identify the issues that must be addressed when using return on investment as a divisional performance measure.
  • Provide examples of differential analysis to make-or-buy decisions with different transfer prices. Describe ethical dilemmas in budgeting.
  • Explain the contribution approach alternative to return on investment for division performance measurement.
  • Calculate economic value added, and identify its use.
  • Compare and contrast expectancy and agency approaches to motivation.
  • Describe the balanced scorecard as a way to tie performance measures to organizational goals.
  • Demonstrate controls that can be instituted to prevent financial fraud.

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