Cornerstones of Managerial Accounting Study Set 5

Answer:

Residual income: The excess of operating income over the minimum rate of return is residual income or the excess of income earned over the expected rate of return.
EVA (Economic value added) : The excess of operating income after tax over dollar cost of capital employed.
In general sense, EVA is residual income with minimum rate of return equal to actual cost of capital for business. But in some cases minimum rate of return differs as company is desired or some other reasons.

Answer:

Margin is the ratio of operating income to sales. This ratio valuates the percentage of operating income generated from each dollar of sale.
For example if the margin percentage is 15, it can be said that $ 0.15 operating income has been generated from sale amount $ 1.00
Turnover is found by dividing sales with average operating assets.
It explains the amount of sale generated from every dollar invested in operating asset.
This ratio shows how effectively the operating assets are utilized in generating sales.
By breaking ROI into margin and turnover, more information is available to assess the performance of an investment. Knowing the margin and turnover gives an idea as to why the ROI may change from one period to the next.
Margin ratio is used to know the percentage of operating income in sales and turnover is used to know how much sales is generated from investment made in operating assets.
These ratios provide more information to the investor in evaluating the return on investment made.

Answer:

Transfer price:
It is a price charged by the selling division for produced goods to the buying division of that company. The price charged for the transferred good affects both
• The cost of the buying division
• The revenues of the selling division
The three common transfer-pricing policies used by the organization are as follows:
1. The first policy is a market price wherein the transfer price is equal to the price at which the product is sold in the competitive market outside the organization.
2. The second policy is a cost based price where the transfer price is equal to the products cost plus a markup above cost.
3. The third policy is a negotiated price where the transfer price is equal to an amount that is negotiated between the buyers and sellers of its product.