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Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher
Edition 3ISBN: 0073527114Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher
Edition 3ISBN: 0073527114Residual Income Measures and New Project Consideration
Refer to the information in Exercises 14-24 and 14-25.
a. What is the division’s residual income before considering the project?
b. What is the division’s residual income if the asset is purchased?
c. What is the division’s residual income if the asset is leased?
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Divisional performance management
Performance measures are developed to assess the divisional performance. Performance measures should be consistent with authority granted and performance measures should assess the effectiveness of actions. Company should also consider those actions of divisional managers that improve the divisional performance but are unfavorable to organization performance. Divisions are assessed on income earned because divisions have revenue and cost both.
Residual income
This is another measure used to evaluate divisional performance. This is not a ratio. Residual income is calculated by deducting the cost of investment from the amount of income after tax. Cost of investment is calculated by multiplying the cost of capital with amount of divisional assets.
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