Accounting for Decision Making



Accounting for Decision Making

Module 5 - SLP

Transfer Pricing

Return on Investment (ROI)

ROI is the performance measure used to interpret the performance of the investments made in the business by marking them against the profits/Returns. The investments made in the projects is analyzed and evaluated on the basis of the ROI and if the result matches the desired objective of the company then further investments will be carried out (Maric et al, 2011)

Coca-Cola ROI = 9019/11404 = 79.08%

Advantages

SimplicityThe calculation of the performance is made simple with this ratio because it is easier to apply the ratio. It provides simple yet specific information regarding the performance of the amount invested in the company.

Consistencythe information provided by the ratio help in determining the alignment of Management Objectives with the company objectives. It combines several factors in measuring the business performance, which enhances the successful operations.

EfficiencyThe information is utilized in order to assess the efficiency of the capital which has been invested. It also provides efficiency measure through which the information can be compared with other subsidiaries of the business and competitors and can be aligned accordingly in order to match or exceed with the industry performance if performing below par. Departmental efficiency can also be measured with the help of this information and investment returns can be calculated on the basis of the revenues generated. Managers can be held accountable for underperformance of their department.

Highlighting the Causeif the returns are declining the managers can be looking into the information determining the exact cause of the decline in ROI (Maric et al, 2011).

Limitations

Availability of the Information The availability of the information is a major concern because the information is not available precisely because of the joint allocation of a particular investment or the biases in the information collected in order to accurately justify the return.

Using the FiguresThe information in the balance sheet may not be accurately used in order to define the returns. The depreciation of the assets should be excluded or included.

Defining a Reasonable ReturnThe information provided by the information cannot be defined reasonable if the result is positive because the information cannot be reasonable until and unless compared with industry benchmarks but it's difficult to find companies which can be worthy of comparisons due to size and the production scale (Maric et al, 2011).

Operating leverage

Operating leverage provides a measure of the ...