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LangfieldSmith7e PPT ch13
LangfieldSmith7e PPT ch13
LangfieldSmith7e PPT ch13
Financial performance
measures and incentive
schemes
profit
Return on investment
invested capital
(cont.)
Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 13-4
Return on investment (cont.)
profit
ROI
invested capital
profit sales revenue
sales revenue invested capital
return on sales investment turnover
(cont.)
Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 13-5
Return on investment (cont.)
• Invested capital
– The assets that the investment centre has available to
generate profits
• Return on sales
– The percentage of each sales dollar that remains as
profit after all the expenses are covered
• Investment turnover
– The number of sales dollars generated by every dollar of
invested capital
(cont.)
Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 13-22
Economic value added (cont.)
• Weighted average cost of capital
• To improve EVA
– Improve profitability without employing
additional capital
– Borrow additional funds when the profits
earned are more than the cost of borrowing
– Pay off debt by selling assets
• Limitations of EVA
(cont.)
Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd
Langfield-Smith, Thorne, Smith, Hilton Management Accounting, 7e 13-26
Theories of motivation (cont.)
• Expectancy theory
– Employee motivation is a result of the strength of the
relationships between expectancy, instrumentality and
valence
– Expectancy: perception that effort will lead to a certain
performance
– Instrumentality: perception that performance will lead to
desired outcome
– Valence: the attractiveness of the reward
• Motivational theories
– need to be considered by managers when they are
designing performance evaluation and incentive schemes