A Disadvantage of Evaluating Managers' Performance Based on ROI Is

question 158

Essay

A disadvantage of evaluating managers' performance based on ROI is that it can lead to undesirable managerial actions.Residual income can overcome many of the problems of ROI.
Required:
a.Define residual income and explain how it is calculated.
b.What are the shortcomings of residual income? Give an example of when ROI is a better measure than residual income.

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Definitions:

Activity Rates

Predetermined rates used in activity-based costing to allocate costs to products or services based on their consumption of activities.

Direct Labor Hours

The total hours worked by employees directly involved in the manufacturing process or providing services, used in calculating production costs or rates.

Product-level Costs

Costs that can be directly attributed to a specific product, including materials and direct labor costs.

Units

Basic measures or quantities used to express a variable, item, or the extent of a service or product used in transactions.