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Steps of choosing an accounting based performance measure
Consider the overall goal of the organization as a whole. It is important to choose a measure of accomplishment that represents top management goals. Such measures include operating income, net income, Return on investment (ROI), sales, etc. Determine whether the measure should be maximized or minimized.
1) Select definitions for such items as income and investments (i.e. should income be based on variable or absorption costing? Must central overheads be allocated? should investments consist of total assets, net assets or net worth?)
2) How should items such as income and investments be measured (i.e. should we use historical costs, replacement costs, realizable or current values?)
3) Determine the standards that should be applied (i.e. should all divisions be required to earn the same rate of return on all investments?)
4) What timing of feedback is needed? Should it be monthly or quarterly?
Laplace Criterion of Rationality This criterion holds that if decision makers do not know the probabilities of the various states of nature and have no reason to think otherwis
Disadvantages of ratio analysis 1) False results: ratios are based upon the financial statement. In case financial ratio is incorrect or the data upon which ratios are based
Analysis of Financial Ratios: Ratios are computed to find out the customer's liquidity position and capability to repay debts. The computed ratios must be compared along with the
Advantages of Value Added Statements 1) Managers might be in a better position to control their organizations own inputs than the cost and usage efficiency of purchased materia
Accounts Payable Turnover Ratio is a short-term liquidity measure which is used to calculate the rate at which a company pays off its suppliers. Accounts payable turnover ratio is
Innova uses 1,056 units of the component IMC2 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows. Direct material
Choose the relationship which best predicts the dependent variable After exploring a diversity of relationships, you should select the one that can best be employed in predicti
The subsequent short-term investment opportunities are obtainable to companies in India to invest their temporary cash excess. a) Treasury Bills: Treasury Bills are short-term
Explain Administration cost and Pre production costs Administration cost: The cost of formulating policy, directing the organization and controlling the operating of an u
MULTIPLE REGRESSION The least square regression equation discussed above was based on the assumption that total cost was determined by only one activity based variable. However
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