Business Unit Performance Measurement - Evaluate divisional accouting income as a performance measure

6 important questions on Business Unit Performance Measurement - Evaluate divisional accouting income as a performance measure

Divisional income (accounting income)

Winst, after-tax income

Division revenue - division costs

Advantages divisional income

  • Easy to understand.
  • Decisions controlled by the manager are reflected.
  • Results of decisions affecting revenues and costs are summarized.
  • It makes comparision of divisions easy.

Disadvantages divisional income

  • The divisions may be of different size.
  • The measure does not fully reflect the managers decisions authority. It does not determine if managers are making good decicions regarding the use of assets.
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Gross margin ratio

Reflects the performance of the manager regarding sales and the cost of goods sold. It ignores costs other than te cost of goods sold.

sales - cost of goods sold / sales

Operating margin ratio

This measure includes the effect of not only the cost of goods sold but also operating costs.

Operating income (bedrijfsresultaat) / sales

Profit margin ratio

This measure includes the effect of divisional activities on taxes.

After-tax income / sales

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