CHAPTER 14 Performance measurement 60114.44 Common cost allocation LO 2
Cathy is a divisional manager with the Insinkerator Company. Her performance report shows a
positive divisional margin but a loss for the year. Cathy has complained to the CEO about the
common costs that have been charged to her division, and questions the method of doing so. If they
were not charged or were allocated in a different way, she would have a favourable profit figure and
would be awarded her bonus. Should Cathy’s bonus be awarded based on the profit figure? Why?
14.45 Environmental and social performance indicators LO 2
Suggest indicators that could be used to assess an improvement in efficiency in each of the
following areas:
a. reduce the energy used in production of goods and services
b. reduce the material intensity of the production of goods and services
c. maximise the sustainable use of renewable resources
d. reduce the dispersion of any toxic material
e. reduce the amount of water used in the production of goods and services
f. increase the literacy rate of employees
g. improve the health and wellbeing of employees
h. contribute to crime prevention in the local area.
14.46 ROI and RI LO 6
Refer to the information supplied in problem 14.42. The management of Coconut Plantations
Pty Ltd has come across a further investment opportunity. It does not want to develop a separate
division, so one of the existing divisions would need to take responsibility for the new investment
opportunity. Management estimates that the new investment opportunity would require an invest-
ment of $90 000 to deliver sales this year of $120 000 with variable costs estimated at $86 500
and fixed costs at $20 000.
Required
a. At present, divisional performance is evaluated based on ROI. If this is the case, which div-
ision would want to take over the new investment opportunity?
b. If the company changed its performance evaluation criteria to encompass residual income
based on a charge for capital of 14 per cent, which division would want to take over the new
investment opportunity?
14.47 Performance measurement manipulation LO 3
For each of the scenarios below, indicate the effect (increase, decrease or no effect) it would have
on ROI, RI, profit margin and asset turnover.
a. Equipment is sold for $40 000. It is currently valued in the books at $50 000 and was orig-
inally acquired for $100 000. Sales will not be affected.
b. The charge for capital is increased from 10 per cent to 12 per cent.
c. A piece of equipment is purchased that will replace some manual operations. Therefore, the
labour required will be reduced and costs will be lowered. It is expected that operating costs
will be reduced by 5 per cent overall.
d. Some obsolete inventory is written down.
e. The production manager produces 5000 more units of product than was planned. The increase
in production does not increase sales.
f. An end-of-year marketing boost increases sales by 5 per cent. This increases profit.
14.48 Taxation of emissions LO 4
The OECD (1998, p. 49) reports that when Sweden introduced a sulphur tax in 1991 to stimulate
SO 2 abatement there was a reduction in the sulphur content of fuel oils by almost 40 per cent
beyond legal standards. A CO 2 tax in Norway is estimated to have reduced CO 2 emissions by
up to 21 per cent. Tax differentiation between leaded and unleaded petrol led to a large reduc-
tion in the use of leaded petrol. In Denmark, a tax on non-hazardous waste doubled the cost of
waste dumping and yet the share of waste dumping in overall waste treatment decreased from 39
to 18 per cent and the rate of reuse and recycling increased from 35 to 61 per cent.