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Strategic Management Accounting

Success can be measured by ensuring that the output is as per the desired estimation from the pre-decided input and effort (Rathore, 2009; Siddiqui, 2006). In such situation, responsibility accounting signifies classifying the financial information that is related to the areas associated with the organisational activity. After considering these financial aspects the responsibilities are allocated for controlling different areas of operations. These areas are also known as responsibility centres. There are various types of responsibility centres, such as cost centre, profit centre, revenue centre, and investment centre (Rao, 2007). The financial performance in the organisation are measured and monitored by the managers by considering the relative measures of profitability. ROI is also a relative measure of financial performance that can be utilised for comparison with the other investments. It also assists in providing a summary of the post return on the capital employed. The concept of ROI is based on the yield or benefit that investors reap on investments (Megginson and Smart, 2008). ROI = (Revenue – Investment) / Investment * 100 (Jupri, n. ...
The focus of ROI is towards profit, and the data required for such calculating is easily available. Apart from this, the size of the divisions does not affect the calculation, and the managers can easily choose the projects with higher ROI. However, ROI ignores various risks, and considers historic measures. In this case the projects which have slow payoff are generally rejected. This also encourages managers to shift their focus towards short-run than long-run (Kimmel, Weygandt and Kieso, 2008). Apart from ROI, EVA is another tool for measuring financial performance that has become popular among the managers. In this case the performance is calculated on the basis of the residual wealth of the organisation that is deducted by the cost of capital from the operating profit. This is also referred as the economic profit. The formula for calculating EAV is stated below EVA = NOPAT (Net Operating Profit after Taxes) – (Capital * Cost of Capital) The organisation having a positive EVA is said to have yielded profit or wealth, while organisation with negative EVA is said to have consumed the capital. The strength of EVA is that it acts as a major indicator of wealth creation and accordingly assists the managers in streamlining the goals of the division or plant with the corporate goals (Ingram, Albright and Ingram, 2006). However, there are certain limitations in this method, especially when it comes to the size of the division or organisation, or financial orientations. Both the methods discussed here suffer from the drawback of tempting managers with short-term profits. EVA is particularly used for aspects like incentive compensation, investor relations, and resource allocation. The premise in this case is ...Show more

Summary

Strategic Management Accounting Part A This section of the study aims at discussing the measures like return on investment (ROI) and economic value added (EVA) for measuring the financial performance of the organisation. An analysis would be done to discuss whether the managers focus are towards short-term gains or not, and if they do so what measures can be taken to overcome such issue…
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