SMM452 Strategic Cost Management
Table of Contents
Lecture 8 – KPIs..................................................................................................................2
Lecture 7 – Performance Measurement..............................................................................4
Lecture 6 – CIMA................................................................................................................6
Lecture 5 – Overhead & Internal Support Costs...................................................................7
Lecture 4 – ABC...................................................................................................................9
Lecture 3 – Joint Costing.....................................................................................................9
Lecture 2 – Job & Process Costing.....................................................................................10
Lecture 1 – Terminology...................................................................................................11
, Lecture 8 – KPIs
Key performance indicators:
1. Return on investment (accounting rate of return)
= Income / investment
- Income measure: NI vs. operating profit
- Investment: TA vs TA – liabilities = equity?
a. Return on Assets (ROA)
(Net income + after-tax interest expense + non-controlling interest) / average
total assets
Non-controlling interest = minority interest (represents dividends
to non-controlling parties; they receive a share of your income
not a good outcome of performance just distribution of income.
After-tax interest expense = what you actually have to bear as a
company since you get tax reductions.
b. Return on Equity (ROE)
Net income excl. Non-controlling interest / average shareholders’ equity excl.
non-controlling interest (= common equity)
Common equity = excl. preferred stock
c. = Return on sales * asset turnover * total leverage
Potential asset distortions
- Lasing: lower assets; boost ROA
- Fair value or amortized cost?
- Differences in age schedule of plant and equipment
You can use average assets or add depreciation beck to correct this
ROI: 2 basic ingredients in profit making:
ROI = (Revenues / Investment) * (Income / Revenue)
Increase ROI by increasing revenues, decreasing costs or decreasing investment.
DuPont decomposition: return on sales * asset turnover * total leverage
(NI / sales) * (sales / total assets) * (TA / common equity)
Advanced DuPont decomposition: ROE = RNOA + spread * financial leverage
RNOA = return on net operating assets = Net operating income / net operating assets
= NOI / NOA
Spread = RNOA – NBC = return on net operating assets – net borrowing costs
o Net borrowing costs = Net financing expense / Net financial obligations = NFE
/ NFO
Financial leverage = Net financial obligations / equity = NFO / equity
2. Return on sales = Net Income / Sales Revenues
3. Residual Income = Net income – (required rate of return * investment)
Investment = total assets
Table of Contents
Lecture 8 – KPIs..................................................................................................................2
Lecture 7 – Performance Measurement..............................................................................4
Lecture 6 – CIMA................................................................................................................6
Lecture 5 – Overhead & Internal Support Costs...................................................................7
Lecture 4 – ABC...................................................................................................................9
Lecture 3 – Joint Costing.....................................................................................................9
Lecture 2 – Job & Process Costing.....................................................................................10
Lecture 1 – Terminology...................................................................................................11
, Lecture 8 – KPIs
Key performance indicators:
1. Return on investment (accounting rate of return)
= Income / investment
- Income measure: NI vs. operating profit
- Investment: TA vs TA – liabilities = equity?
a. Return on Assets (ROA)
(Net income + after-tax interest expense + non-controlling interest) / average
total assets
Non-controlling interest = minority interest (represents dividends
to non-controlling parties; they receive a share of your income
not a good outcome of performance just distribution of income.
After-tax interest expense = what you actually have to bear as a
company since you get tax reductions.
b. Return on Equity (ROE)
Net income excl. Non-controlling interest / average shareholders’ equity excl.
non-controlling interest (= common equity)
Common equity = excl. preferred stock
c. = Return on sales * asset turnover * total leverage
Potential asset distortions
- Lasing: lower assets; boost ROA
- Fair value or amortized cost?
- Differences in age schedule of plant and equipment
You can use average assets or add depreciation beck to correct this
ROI: 2 basic ingredients in profit making:
ROI = (Revenues / Investment) * (Income / Revenue)
Increase ROI by increasing revenues, decreasing costs or decreasing investment.
DuPont decomposition: return on sales * asset turnover * total leverage
(NI / sales) * (sales / total assets) * (TA / common equity)
Advanced DuPont decomposition: ROE = RNOA + spread * financial leverage
RNOA = return on net operating assets = Net operating income / net operating assets
= NOI / NOA
Spread = RNOA – NBC = return on net operating assets – net borrowing costs
o Net borrowing costs = Net financing expense / Net financial obligations = NFE
/ NFO
Financial leverage = Net financial obligations / equity = NFO / equity
2. Return on sales = Net Income / Sales Revenues
3. Residual Income = Net income – (required rate of return * investment)
Investment = total assets
