Introduction

Enager Industries Ltd ( Enager ) was a comparatively immature company whom manufactured and produced products/services within three divisions- Consumer Products. Industrial Products and Professional Services. Consumer Products. the oldest among the three divisions in Enager. designed. manufactured and marketed a line of houseware points. Industrial Products built one -of -a- sort machine tools to client specifications. Professional Services. the newest among the three. provided several sorts of technology services and this division had grown quickly because of its capableness to execute “environmental impact” surveies. Each division was treated as an basically independent company but all new undertaking proposals necessitating investing in surplus of $ 1. 500. 000 had to be reviewed by the Chief Financial Officer. Henry Hubbard.

Analysis

Carl Randall. Enager’s president. had transformed the three clearly separate divisions from being treated as net income centres into investing centres in 1992 at the goad of Henry Hubbard. The alteration enabled the three divisions to utilize ROA ( Return on Assets ) as a public presentation step of the success of each division. The ROA was defined to be the division’s net income divided by its entire assets the division used to bring forth its net incomes.

The net income for a division was calculated by taking the division’s “direct income before taxes” . deducting the division’s portion of corporate administrative disbursals and its portion of income revenue enhancement disbursals. On the other manus. the entire assets of a division was calculated by taking the division’s assets. including receivables and the allocated corporate-office assets. including the centrally controlled hard currency history. based on the footing of divisional grosss. In add-on. all fixed assets were recorded at their balance sheet values- original cost less accrued consecutive line depreciation. Based on these computation techniques. the amount of divisional net income and assets were equal to the corporate net income and assets severally.

Hubbard believed that a company like Enager should hold a gross return on assets. defined as equal to net incomes before involvement and revenue enhancements divided by assets. of at least 12 per centum. given the involvement rates the company had had to pay on its debt. He told each division director that the division was to seek to gain a gross return of 12 per centum and new investing proposals would hold to demo a return of at least 15 per centum in order to be approved. The company had managed to increase its ROA from 5. 2 per centum to 5. 7 per centum and its gross return from 9. 3 per centum to 9. 5 per centum from 1991 to 1992.

However. several issues arose with respect to this new method. First. there was a job occurred between Sarah McNeils. the merchandise development director of Consumer Products Division. and Hubbard while her new proposal demonstrated a return of 13 per centum ( calculated in Exhibit 1 ) at different point of selling monetary values and units. nevertheless. it was rejected by Hubbard because it did non run into the 15 per centum return he had set for all divisions.

Another job that arose within Enager was between the Industrial Products Division. and the president. The job occurred when the president was unsatisfied with the ROA of Industrial Products Division and tried to set force per unit area on the general director of the division. A struggle arose between them when the division director argued that the division could hold achieved a better ROA if they had a batch of old assets as Consumer Products Division did.

Furthermore. in 1993. ROA fell from 5. 7 per centum to 5. 4 per centum and gross return dropped from 9. 5 per centum to 9. 4 per centum. However. at the same clip. return on gross revenues rose from 5. 1 per centum to 5. 5 per centum and return on owners’ equity besides increased from 9. 1 per centum to 9. 2 per centum. Comparing the public presentation based on ROA in this twelvemonth. Professional Services Division exceeded the 12 per centum gross return mark ; Consumer Products Division’s gross ROA was 10. 8 per centum ; the Industrial Products Division’s gross ROA was merely 6. 9 per centum. The president was defeated and puzzled about the consequences of ROA in 1993.

I recognize that these jobs were chiefly resulted from inefficient usage of ROA ( Return on Assets ) as a public presentation measuring method in Enager. First. the president and the CFO should non put a mark gross ROA rate of 15 per centum for three different divisions that were evidently runing in different industries–Consumer Products Division produced a line of high volume low cost houseware points ; Industrial Products Division was a big “job shop” who built one-of- sort machine tools to client specifications. and Professional Services chiefly provided technology services. The three divisions had different sum of assets. nature of concern and profitableness and it is unreasonable to compare them with a fixed mark rate of ROA.

Second. the executives were doing a error by utilizing balance sheet values when ciphering the fixed assets of each division. This had disadvantaged the divisions that contained more new assets with lesser depreciation values since ROA would be reduced due to a larger denominator resulted from higher values in assets. The president did non understand the remark from the director of Industrial Products Division about the older a division’s assets would ensue in a higher ROA. And it was unjust to mensurate a division’s success based on the age of a division’s assets. and accordingly. this would thwart the director in a division with a batch of new assets.

Third. it was unreasonable to apportion corporation’s assets and disbursals to divisional assets and net income based on gross generated by the division. For illustration. if Professional Services Division was gaining more than other two divisions. Professional Services’ return would be reduced by this inaccurate allotment method while more allocated corporate disbursals would diminish the numerator and more allocated corporate assets would increase the denominator of the ROA computation. later. the ROA would non to the full reflect division’s true public presentation.

Recommendation and ImplementationCurrently. Enager is utilizing ROA as a method of public presentation rating of the three divisions. As antecedently illustrated. this is an inefficient usage of ROA since entire divisional assets and net income are influenced by changing constituents. ROA in its current signifier does non paint an accurate image of the overall public presentation of the company. For illustration. division contains more assets is evidently disadvantaged since their ROA would be subsided by a larger sum of denominator. In add-on. the company could non give the highest grosss by puting a benchmark ROA rate in which all divisions are encouraged to achieve. For illustration. McNeils’ proposal was rejected because it did non run into the 15 per centum return required by Hubbard. However. McNeil’s proposal demonstrates a return of 13 per centum. and favorable residuary income at any point under the 13 per centum Weighted Average Capital Cost. Enager had missed the chance to increase the net incomes per portion of the company due to falsely puting a mark rate for all three divisions.

The company could take an alternate step of divisional public presentation such as Balanced Scorecard. Balanced Scorecard is a public presentation measuring system which measures a division’s activities in footings of its ends and schemes instead than a ratio like ROA. The direction could obtain a broad-based position of the public presentation of a division from both divisional fiscal and non fiscal elements. In set uping the Balanced Scorecard. executives must take a mix of measurings that accurately reflect the of import factors that will find the success of the divisional scheme ; demo the relationships among the single steps in a cause-and-effect mode ; and supply a comprehensive position of the current status of the division. The Balanced Scorecard promotes a balance among different strategic steps in an attempt to accomplish end congruity. therefore furthering employees to move in the organization’s best involvement.

If Enager were to utilize Balanced Scorecard. divisions would be able to hold the same net income aims by concentrating on the same ends of the company but non merely concentrating on a fixed mark return rate. For illustration. by presenting Balanced Scorecard. this would let McNeils to transport out her proposal that would profit the company as a whole but may hold a heavy impact on her divisional ROA. Another advantage of Balanced Scorecard. unlike ROA. is that the comprehensive value of the division is reflected in this method. This allows executives of Enager to better comparison between divisions operated in different industries since the public presentation measuring system takes different positions such as fiscal. client. internal concern and invention of the division into history.

After analysing the two options I recommend that Enager implement Balanced Scorecard method for their division public presentation steps. I feel that ROA reduces the comparison between divisions. bounds enlargement for the company and the single divisions. and accordingly it does non supply just public presentation measurings for divisions and the company. For illustration. ROA fell from 5. 7 per centum to 5. 4 per centum from 1992 to 1993 but at the same clip. return on gross revenues rose from 5. 1 per centum to 5. 5 per centum and return on owners’ equity besides increased from 9. 1 per centum to 9. 2 per centum. This suggests that ROA does non to the full picture the true public presentation of the company.

Balanced Scorecard. on the other manus. is a better method for Enager for measuring divisional public presentation because it efficaciously depicts public presentation from fiscal and non-financial positions. This is a better measuring method for Enager particularly its divisions were runing in different industries. Furthermore. Balanced Scorecard promotes end congruity because divisions will non merely be working to better themselves. but the determinations that are made will profit the company as a whole.

ConclusionEnager Industries Ltd was a comparatively immature company whom manufactured and produced products/services within three divisions. The company was utilizing ROA method in measuring divisional public presentation. There were a few jobs and struggles arose within the company due to inefficient usage of ROA. Switch overing to Balanced Scorecard will assist Enager obtain stronger end congruency while relieving some inefficiency in public presentation step created by ROA.

Robert N. ( 2007 ) . “Management Control Systems” . McGraw-Hill: New York.

American Accounting Association Financial Accounting Standards Committee. ( 2003. June ) . Deductions of Accounting Research for the FASB’s Initatives on Disclosure of Information about Intangible Assets. Accounting Horizons. 17. 175-185. Retrieved January 19. 2007 from ABI-Inform.

hypertext transfer protocol: //0-proquest. umi. com. darius. uleth. ca:80/pqdweb? did=356893801 & A ; sid=1 & A ; Fmt=3 & A ; clientId=12304 & A ; RQT=309 & A ; VName=PQDUpton. W. S. ( 2001. April ) . Business and Financial Reporting: Challenges from the New Economy. FASB Financial Accounting Series Special Report No. 219-A. Retrieved September 6. 2006 from