Accounting Analysis

Accounting Analysis

Accounting Analysis

BOARD OF DIRECTORS

DM:

Board Meeting

ACTION DISCUSSION INFO

X

TO:London plc Board of Directors

From: Divisional Manager

April 1, 2012

Subject: Board Policy on Goal Setting, and performance for the

Divisional Manager

RECOMMENDED ACTION

It is recommended by the Divisional Manager that the Board of Directors adopt a policy (guideline) for the divisional manager goal setting, performance of Manager and performance of division. INTRODUCTION

In March 2010, the Auditors, Liverpool have completed their audit for the executive compensation practices at London plc. While much of their work centered on the past practices with the divisional manager, a number of (Erhardtet.al,2003) recommendations were provided that the present Board of Directors would like to incorporate their current role for the Division Manager position. Board needs to build the performance goals for the Divisional Manager, including the prescribed guidance in order to ensure that the performance goals of divisional managers will meet their overall objective and achieving the bench mark on Return on investment before taxation. (p.2003)

The purpose of the policy by (Board of Rechner, 1991, p.155-160) Directors is to make a clear process for the goal setting and also building the annual goals for the divisional manager which is transparent and well documented.

Discussion

Tools and Techniques

DUPONT MODEL

In order to calculate the return on the investment the DuPont calculation is being used which is a valuable tool for the return on investment calculation or return on assets. This model also allows the return on equity. There are various other methods to calculate the return on assets or return on investments but as DuPont method allows the manager and business owner to break the profitability of the organization into components parts where it actually comes from.

Advantages and Disadvantages of ROI

Advantages

SIMPLICITY

Return on investment is very simple and common technique and also very the formula is very easy to apply. Return on equity does not go through the multiple year cash flow discounting plan due to which spontaneous equation can be used. The simplest concept of Return on Investment is that the manager will be encouraged because of focusing on the earnings with respect to the relation to the asset used which provide benefits to the company. The return on investment formula fail to include as it used the same approach of accepting and rejecting the decision similar to other inclusive measures for investment projects that do not have constant changes in capital outlays during investment years, one thing that the ROI formula does fail to include, using ROI leads to the same accept or reject decision as other inclusive but includes less efforts as compared to other methods.

CONSISTENCY

Return on investment is consistent as compared with the management reward system where ROI is used as per the performance metric, which reveals the direct investment results expected by the manager. The ROI makes the straight business decisions which is much better than the personal financial interests of a manager.

UNIFORMITY

The technique of Return on investment is much more favorable for the investors in order to evaluate the performance ...