AFM102 Lecture 21: Lecture 21- Residual Income
15 Oct 2015
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***chapter 7 budgeting will not be on the exam. Big business- operate in segments: departments, divisions, locations. Therefore you must evaluate the performance of the segments. Type of business segment: cost centre: manager has control over costs but not over revenues. No control oer the amount of investment made in the unit (hr, manufacturing, quality control, assembly, accounting ) Compare actual costs to the budgeting cost to evaluate performance. Common costs allocated to the department should be ignored in evaluating performance: profit centre: manager has control over cost and revenues, but not the investment. E. g. division that sells/ produces goods, retail stores. Evaluating based on roi- return on investment, residual income or roe- Return on equity (if done, estimate equity required for the centre: segment reporting. Sales less the variable costs less the traceable fixed costs. Common fixed costs costs that support the entire operation and must be ignored. Roi-return on investment roi= operating income/ average operating assets.
