2024 – Ashford 7 Week 6 Discussion 1 Your initial discussion thread is due on Day

Burton_Brad_Week 6_Discussion 1

Brad Burton

3/22/2016 8:16:17 AM

           Three examples of accounting methods that could cause divisions’ profits to differ are return on investment (ROI), residual income, and economic value added.

            ROI is (Profit/Sales) X (Sales/Investment) or simply Profit/Investment. Although this is a ratio which helps compare divisions’ of unlike sizes, a problem that could cause divisions’ profits to differ are the items that define the numerator and denominator not being consistent throughout divisions’.

            Residual Income is the operating profit of a division after subtracting an assigned charge for the operating capital (Schneider, 2012). Since residual income is based on a dollar and not a ratio like ROI, comparing two divisions’ of different sizes becomes very difficult.

            Economic value added approach deducts a minimum rate of return from the divisions profits (Schneider, 2012). An example of this could be deducting cost of capital multiplied by total capital from adjusted accounting profit. This can differ among divisions’ because the division profits are an after-tax dollar which can vary among divisions’ along with the deduction varying as well. These two factors can create differing profits among divisions’.

References

Managerial accounting: Decision making for the service and manufacturing sectors (2012). San    Diego, CA: Bridgepoint Education

Respond

Divison Evaluation Methods

Toby Kilbourn

3/22/2016 3:35:41 PM

During the evaluation of independent divisions a business can choose from multiple different evaluation methods. Schneider (2012) list the following methods for evaluating divisional performance within an organization: return on investment (ROI), residual income and economic value added (EVA). According to Putra (2009), “Absolute profit is not a good measure because it does not consider the investment in the business and how long-term profits can be affected by short-term decisions such as reducing research, maintenance and advertising expenditure. These decisions will improve reported profits in the current year, but will usually have a detrimental long-term impact. The performance of divisions and their managers can be evaluated using two methods: either return on investment or residual income” (para. 7) 

ROI is defined by the following ratio: ROI = Profit/Investment. This formula seems simple, however, there are multiple variations for the numerator and denominator. Each combination of numerator and denominator will produce a different value for divisional profits. An example of this is the segment margin (numerator) which excludes common overhead cost. However, the overhead of each division will differ by the nature of their operations, thus there will be inherent differences in profit that are not accounted for in the calculation of ROI. Additional variances in profit between divisions can arise from different inventory methods (FIFO vs LIFO), depreciation, and capitalizing or expensing costs (Schneider, 2012).  

The residual income method focuses on the dollar amount and expected return of each division. It is defined as the operating profit minus the operating capital consumed. The residual income method has many of the same issues as the ROI method but it reduces the motivational problems created by the ROI system. Additionally, the residual income method is impacted by the size of the division, stage of growth for the respective divisions being evaluated (Schneider, 2012).  

EVA is similar to residual income and is calculated by the following formula: EVA = Adjusted Accounting Profit – ( Cost of Capital X Total Capital). Thus the EVA method measures a dollar amount. Differences in profits between divisions evaluated by the EVA method can come from managers cutting research and development expenditures and differences in capital cost assigned to divisions (Schneider, 2012).  

References 

Putra, L. (2009). Performance Evaluation of Division Units [Solomon’s Way]. Retrieved from http://accounting-financial-tax.com/2009/02/performance-evaluation-of-business-units-solomon-way/ 

Schneider, A. (2012). Managerial accounting: Decision making for the service and manufacturing sectors. San Diego, CA: Bridgepoint Education  

Respond

Burton_Brad_Week 6_Discussion 2

Brad Burton

3/22/2016 8:18:10 AM

Recognized Activities:

–          Check in with receptionist

–          Waits to be called by nurse

–          Patient moves from waiting room to inner office

–          Patient then weighs in and then is assigned a room

–          Nurse assigning the patient to a room gathers all the data to update records

–          Nurse also takes initial blood simple for blood sugar testing and blood pressure test

–          Patient then waits for the doctor to come in 

–          After the doctor, the nurse returns to take more blood samples depending on what the doctor needs

–          The patient then waits until the dietician comes to review eating habits etc.

–          Patient returns to the reception to pay and schedule the next visit

            Dr. Rosenthal has his own medical practice with a staff of a receptionist, two nurses, a lab technician, and a dietician. As this office assists patients from start to finish, many activities occur that can be broken into multiple categories of process time, inspection time, move time, wait time, and storage time.

            Schneider (2012), defines those followings terms as:

1.      Process Time: Time in which a product is undergoing conversion activities which transform raw materials into finished products. This could be viewed as the sum of many value-added activities.

2.      Inspection Time: Amount of time the product is of high quality

3.      Move Time: Amount of time spent moving raw materials, work in process, or finished products between operations within the plant.

4.      Wait Time: Amount of time that materials or work in process spend waiting for the next operation.

5.      Storage Time: Time in which finished products are held in stock before shipment to customers.

Assigned Activities

Process Time                           Inspection Time                                  Move Time

            Wait Time                               Storage Time

            Non value-added time is the presence of inefficiency or other nonproductive activities (Schneider, 2012). The following items are marked as non value-added activities:

1.      Patient moves from waiting room to inner office

2.      Patient then weighs in and then is assigned a room

3.      Nurse assigning the patient to a room gathers all the data to update records

4.      Nurse also takes initial blood simple for blood sugar testing and blood pressure test

5.      After the doctor, the nurse returns to take more blood samples depending on what the doctor needs

6.      The patient then waits until the dietician comes to review eating habits etc.

            These items are non value-added for their own specific reasons. The first activity should have the client move from the check in to the inner office right away, instead of waiting to wait to go to the inner office. The second activity should be completed while all the blood work and other records are being done. The third activity should be completed after all the blood samples and weigh in are completed as that data will need to be recorded and updated anyway. The fourth activity can be completed after the doctor suggests any additional tests. With that said, this eliminates two potential blood samplings and makes it more efficient for the office along with a pleasant experience for the client. The fifth activity is when all testing, weigh in, initial blood sampling and suggested blood sampling should take place while updating medical records. Now if need be, the doctor could come in afterwards to review the findings on a case by case basis. Lastly, the sixth activity should be completed while the patient is waiting in the inner room. This eliminates the “waiting” for the client as this can transform it to value-added time and also allows the office to prepare for the patient. Having the dietician come in afterwards keeps a prior client in an office longer when a new patient in the inner room could potentially utilize that office. This creates more efficiency and the ability to increase revenues by seeing more clients in the same amount of time.

References

Managerial accounting: Decision making for the service and manufacturing sectors (2012). San    Diego, CA: Bridgepoint Education

Respond

Dr. Rosenthal’s Office Activity Analysis

Toby Kilbourn

3/22/2016 5:17:51 PM

According to Schneider (2012) process time is the time spent converting raw material into a finished product. Inspection time consist of the time spent verifying the quality of the finished product. Move time is the time invested to move raw materials, work in process, or the final product between stations. Wait time consists of the time raw materials or unfinished products spend in transition between processes. And storage time is the time a product is held in stock.   

Table 1 identifies the specific service products/activities produced by Dr. Rosenthal’s office and the associated time allocations.  

Businessdictionary.com (2016 defines non value-added activities as those, “that generates a zero or negative return on the investment of resources and usually can be eliminated without impairing a process” (para. 1). Schneider (2012) describes non value-added activities as those a resource consuming activity that does not increase a product’s value. The following activities in Dr. Rosenthal’s office fall under the non value added activities: waiting room time, exam room waiting times, and gathering of initial blood sample. Waiting times are classified as non value added because office space is tied up while the patient waits for inspection and processing. No value is added during wait time. The initial blood sample is a redundant process which could be combined with the second blood sample. Combining these activities would eliminate a process and decrease material consumption in the form of needles, gauze, and other medical supplies in addition to freeing up the nurse for other patients.  

References 

Businessdictionary.com. (2016). Non Value Added Activity. Retrieved from http://www.businessdictionary.com/definition/non-value-added-activity.html 

Schneider, A. (2012). Managerial accounting: Decision making for the service and manufacturing sectors. San Diego, CA: Bridgepoint Education 

Respond