541. Because it is in the best interests of the company as a whole to accept any project whose rate of return is above the minimum required rate of return, managers who are evaluated based on residual income will tend to make better decisions concerning investment projects than managers who are evaluated based on ROI.542. When comparing investment centers, it is probably better to focus on the percentage change in residual income from year to year rather than on the absolute amount of the residual income.543. The elapsed time from when production is started until finished goods are shipped to customers is called throughput time, or manufacturing cycle time.544. First, financial measures are lag indicators that report on the results of past actions. In contrast, nonfinancial measures of key success drivers such as customer satisfaction are leading indicators of future financial performance.545. In essence, the balanced scorecard lays out a theory of how the company can take concrete actions to attain its desired outcomes.546. One of the advantages of the balanced scorecard is that it continually tests the theories underlying management’s strategy.547. Managers must be confident that the performance measures are reliable, sensible, understood by those who are being evaluated, and not easily manipulated.548. The residual income and EVA approaches solve this problem by giving managers full credit for any returns in excess of the company’s required rate of return.549. The various measures in a balanced scorecard should be linked on a plausible cause-and-effect basis from the very lowest level up through the organization’s ultimate objectives.550. The balanced scorecard is essentially a theory about how specific actions taken by various people in the organization will further the organization’s objectives.551. The balanced scorecard is a dynamic measurement system that evolves as an organization learns more aboutwhat works and what doesn’t work and refines its strategy accordingly.552. Managers are intensely interested in how transfer prices are set because they can have a dramatic effect on the reported profitability of their divisions.553. Throughout the discussion, keep in mind that the fundamental objective in setting transfer prices is to motivate the managers to act in the best interests of the overall company.554. Clearly, if the transfer price is below the selling division’s cost, the selling division will incur a loss on the transaction and it will refuse to agree to the transfer.555. In sum, if the transfer has no effect on fixed costs, then from the selling division’s standpoint, the transfer price must cover both the variable costs of producing the transferred units and any opportunity costs from lost sales.556. On the other hand, if the company as a whole makes money on the transfer, there will be a profit to share, and it will always be possible for the two divisions to find a mutually agreeable transfer price that increases the profits of both divisions.557. Therefore, if the managers understand their own businesses and are cooperative, then they should always be able to agree on a transfer price if it is in the best interests of the company that they do so.558. If managers are pitted against each other rather than against their own past performance or reasonable benchmarks, a noncooperative atmosphere is almost guaranteed.559. If the market price is used as the transfer price, the selling division manager will not lose anything by making the transfer, and the buying division manager will get the correct signal about how much it really costs the company for the transfer to take place.560. The principles of decentralization suggest that companies should grant managers autonomy to set transfer prices and to decide whether to sell internally or externally.
