Blue is the controller at the Acme Shoe Company, a large manufacturing company located in Franklin, Pennsylvania. Acme has many divisions, and the performance of each division has typically been evaluated using a retum on investment (ROI) formula. The return on investment is caleulated by dividing profit by the book value of total assets. In a meeting yesterday with Bob Burn, the compuny president, Blue warned that this return on investment measure might not be accurately rellecting how well the divisions are doing. Blue is concerned that by using profits and the book value of ussets, division managers might be engaging in some short-term finagling to show the highest possible return. Bob concurred and asked what other numbers they could use to evaluate division performance. Blue said,T'm not sure, Bob. Net income isn't a good number for evaluation purposes. Becuse we allocate a lot of overhead costs to the divisions on what some managers consider an arbitrary basis, net income won't work as a performance measure in place of return on investment" Bob told Blue to give some thought to this problem and report back to him. Requirements Explain what managers can do in the short run to maximize return on investment as calculated at Acme. What other accounting measures could Acme use to evaluate the performance of its divisional managers? b. Deseribe other instances in which accounting numbers might lead to dysfunctional behavior in an organization. Scarch the Internet and find at least one company that offers an information system (or software) that might help Blue evaluate his company's performance.
Blue is the controller at the Acme Shoe Company, a large manufacturing company
located in Franklin, Pennsylvania. Acme has many divisions, and the performance of
each division has typically been evaluated using a retum on investment (ROI)
formula. The
In a meeting yesterday with Bob Burn, the compuny president, Blue warned that this
return on investment measure might not be accurately rellecting how well the
divisions are doing. Blue is concerned that by using profits and the book value of
ussets, division managers might be engaging in some short-term finagling to show the highest possible return. Bob concurred and asked what other numbers they could use to evaluate division performance.
Blue said,T'm not sure, Bob. Net income isn't a good number for evaluation
purposes. Becuse we allocate a lot of overhead costs to the divisions on what some
managers consider an arbitrary basis, net income won't work as a performance
measure in place of return on investment"
Bob told Blue to give some thought to this problem and report back to him.
Requirements
Explain what managers can do in the short run to maximize return on
investment as calculated at Acme. What other accounting measures could
Acme use to evaluate the performance of its divisional managers?
b. Deseribe other instances in which accounting numbers might lead to
dysfunctional behavior in an organization.
Scarch the Internet and find at least one company that offers an information
system (or software) that might help Blue evaluate his company's
performance.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
