Management Information Flashcards

Return on investment (ROI) for a division is calculated as:

Answer: Profit / Net assets (capital employed) × 100%

ROI = Divisional profit / Divisional net assets × 100%. It measures how effectively the division uses its assets to generate profit, and is the primary financial metric for investment centres.

Residual income (RI) is calculated as:

Answer: Divisional profit minus a notional capital charge (required return × capital employed)

RI = Divisional profit − (Required return × Capital employed). Unlike ROI, RI encourages divisions to accept projects that earn above the required return, avoiding the underinvestment problem.

A cost driver in ABC is:

Answer: The factor that causes the cost of an activity to change

A cost driver is the factor that causes costs to be incurred; for example, the number of machine setups drives setup costs. Identifying cost drivers enables more accurate allocation of overheads.

Kaizen costing focuses on:

Answer: Continuous incremental cost reduction during the production phase

Kaizen costing (from the Japanese concept of continuous improvement) aims to achieve small, ongoing cost reductions during manufacturing through employee suggestions and process improvements.

Variance analysis is most useful for management when it is:

Answer: Reported promptly and broken down into controllable components

Variance analysis is most useful when reported on a timely basis (so corrective action can be taken) and when variances are analysed into controllable and uncontrollable elements, clearly attributing responsibility.

In decision making, a sunk cost should be:

Answer: Excluded from decision making as it has already been incurred and cannot be recovered

Sunk costs have already been incurred and cannot be recovered regardless of the decision made; they are therefore irrelevant to future decisions and should be excluded from analysis.