Question
You have recently been appointed as the management accountant attached to the head office of the company with special responsibility of monitoring the performance of
You have recently been appointed as the management accountant attached to the head office of the company with special responsibility of monitoring the performance of the companies within the group. Each company is treated as an investment center and every month produces an operating statement for the group headquarters. Summaries of the statements for companies X and Y which make similar products selling at similar prices for the last month showed a typical situation.
Extract from the company monthly operating statements.
X Y
GHS000 GHS000
Sales 600 370
Less variable cost 229 208
Contribution 371 162
Less controllable fixed overheads 65 28
Controllable profit 306 134
Less apportioned group costs 226 119
80 15
Company Assets GHS6.4M GHS0.9M
Estimated return on capital employed (on annual basis) 15% 20%
Although both companies are earning more than the target return on capital of 12%, there is pressure of interest rates which means this rate must be increased soon and the board is concerned at the relatively low return achieved by X.
REQUIRED
i). Redraft the operating statement using an alternative performance measurement to return on capital employed and interpret them against a background of rising interest
iii). critically compare the use of return on capital employed and the alternative performance measure used in (ii) above to assess investment Centers.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started