Enager Industries Ltd Essay

IntroductionEnager Industries Ltd (Enager) was a relatively young participation whom manufactured and produced products/ operate within trio variabilitys- Con mag boodleic coreer Products, Industrial Products and master key serve. Consumer Products, the oldest among the third familys in Enager, designed, manufactured and marketed a line of houseware items. Industrial Products reinforced integrity -of -a- kind machine tools to customer specifications. passe-partout Services, the newest among the three, provided several kinds of applied science service and this section had grown rapidly because of its capability to perform environmental bushel studies. Each plane section was treated as an essentially independent troupe but all new project marriage offers requiring investment in oversupply of $1,500,000 had to be reviewed by the Chief fiscal Officer, Henry Hubbard.AnalysisCarl Randall, Enagers president, had transformed the three distinctly separate divisions from being t reated as profit centers into investment centers in 1992 at the urging of Henry Hubbard. The metamorphose en abled the three divisions to use ROA (Return on Assets) as a effect note of the success of each division. The ROA was be to be the divisions gain income divided by its total assets the division used to generate its profits.The dough income for a division was calculated by taking the divisions direct income before taxes, subtracting the divisions share of corporate administrative expenses and its share of income tax expenses. On the other hand, the total assets of a division was calculated by taking the divisions assets, including receivables and the allocated corporate-office assets, including the centrally controlled cash account, based on the basis of divisional revenues. In addition, all flash-frozen assets were recorded at their balance sheet prys- original follow less(prenominal) accumulated straight line wear and tear. Based on these calculation techniques, th e sum of divisional net income and assets were equal to the corporate net income and assets respectively.Hubbard believed that a federation like Enager should have a gross damages on assets, defined as equal to net income before interest and taxes divided by assets, of at least 12 portion, given the interest rates the bon ton had had to pay on its debt. He told each division private instructor thatthe division was to try to earn a gross return of 12 portion and new investment proposals would have to show a return of at least 15 portion in order to be approved. The go with had managed to change magnitude its ROA from 5.2 portion to 5.7 percent and its gross return from 9.3 percent to 9.5 percent from 1991 to 1992.However, several issues a rosiness with regard to this new mode. First, there was a problem occurred amid Sarah McNeils, the product development manager of Consumer Products Division, and Hubbard while her new proposal demonstrate a return of thirteen percent ( calculated in Exhibit 1) at variant point of selling prices and units, however, it was rejected by Hubbard because it did not knock against the 15 percent return he had set for all divisions.another(prenominal) problem that a rosaceous within Enager was between the Industrial Products Division, and the president. The problem occurred when the president was unsatiated with the ROA of Industrial Products Division and tried to put pressure on the cosmopolitan manager of the division. A conflict arose between them when the division manager argued that the division could have achieved a mend ROA if they had a lot of old assets as Consumer Products Division did.Furtherto a greater extent, in 1993, ROA fell from 5.7 percent to 5.4 percent and gross return dropped from 9.5 percent to 9.4 percent. However, at the said(prenominal) time, return on sales rose from 5.1 percent to 5.5 percent and return on owners equity also change magnitude from 9.1 percent to 9.2 percent. Comparing the p erformance based on ROA in this year, Professional Services Division exceeded the 12 percent gross return place Consumer Products Divisions gross ROA was 10.8 percent the Industrial Products Divisions gross ROA was only 6.9 percent. The president was disappointed and puzzled about the results of ROA in 1993.I recognize that these problems were mainly resulted from wasteful use of ROA (Return on Assets) as a performance cadencyment manner in Enager. Firstly, the president and the chief financial officer should not set a scrape gross ROA rate of15 percent for three contrasting divisions that were obviously operating in different industriesConsumer Products Division produced a line of high volume low cost houseware items Industrial Products Division was a large job shop who built one-of- kind machine tools to customer specifications, and Professional Services mainly provided engineering services. The three divisions had different count of assets, nature of business and profitabi lity and it is immoderate to compare them with a fixed target rate of ROA.Second, the executives were making a mistake by using balance sheet values when collusive 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 high values in assets. The president did not understand the comment from the manager of Industrial Products Division about the older a divisions assets would result in a higher ROA. And it was unfair to measure a divisions success based on the age of a divisions assets, and therefore, this would frustrate the manager in a division with a lot of new assets.Third, it was unreasonable to allocate corporations assets and expenses to divisional assets and net income based on revenue generated by the division. For example, if Professional Services Division was earning more than other two divisions, Professional Services retu rn would be reduced by this inaccurate allocation method while more allocated corporate expenses would decrease the numerator and more allocated corporate assets would increase the denominator of the ROA calculation, subsequently, the ROA would not fully reflect divisions true performance. good word and ImplementationCurrently, Enager is using ROA as a method of performance evaluation of the three divisions. As previously illustrated, this is an inefficient use of ROA since total divisional assets and net income are influenced by varying components. ROA in its current form does not paint an accurate picture of the overall performance of the company. For example, division contains more assets is obviously disadvantaged since their ROA would be subsided by a larger amount of denominator. In addition,the company could not yield the highest revenues by setting a benchmark ROA rate in which all divisions are encouraged to attain. For example, McNeils proposal was rejected because it did not meet the 15 percent return postulate by Hubbard. However, McNeils proposal demonstrates a return of 13 percent, and complimentary residual income at any point under the 13 percent Weighted Average Capital Cost. Enager had missed the opportunity to increase the earnings per share of the company due to incorrectly setting a target rate for all three divisions.The company could demand an alternative measure of divisional performance such as fit visiting card. Balanced Scorecard is a performance measurement system which measures a divisions activities in terms of its finishs and strategies rather than a ratio like ROA. The circumspection could see a broad-based view of the performance of a division from some(prenominal) divisional financial and non financial elements. In establishing the Balanced Scorecard, executives must choose a mix of measurements that accurately reflect the important factors that will root the success of the divisional strategy show the relationships among the individual measures in a cause-and-effect manner and provide a comprehensive view of the current modify of the division. The Balanced Scorecard promotes a balance among different strategic measures in an effort to achieve goal congruence, thus fostering employees to act in the organizations best interest.If Enager were to use Balanced Scorecard, divisions would be able to have the same profit objectives by focusing on the same goals of the company but not just focusing on a fixed target return rate. For example, by introducing Balanced Scorecard, this would allow McNeils to choose out her proposal that would benefit the company as a unscathed but may have a lowering 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 compare between divisions operated in different industries since the performance measurement system takes different perspectives such as financial, customer, sexual business and innovation of the division into account.After analyzing the two alternatives I advise that Enager implementBalanced Scorecard method for their division performance measures. I feel that ROA reduces the comparability between divisions, limits expansion for the company and the individual divisions, and consequently it does not provide fair performance measurements for divisions and the company. For example, ROA fell from 5.7 percent to 5.4 percent from 1992 to 1993 but at the same time, return on sales rose from 5.1 percent to 5.5 percent and return on owners equity also increase from 9.1 percent to 9.2 percent. This suggests that ROA does not fully depict the true performance of the company.Balanced Scorecard, on the other hand, is a better method for Enager for assessing divisional performance because it effectively depicts performance from financial and non-financial perspectives. This is a better measurement method for Enager especially its divisions were operating in different industries. Furthermore, Balanced Scorecard promotes goal congruence because divisions will not only be working to better themselves, but the decisions that are made will benefit the company as a whole.ConclusionEnager Industries Ltd was a relatively young company whom manufactured and produced products/services within three divisions. The company was using ROA method in assessing divisional performance. There were a few problems and conflicts arose within the company due to inefficient use of ROA. Switching to Balanced Scorecard will help Enager obtain stronger goal congruency while alleviating some inefficiency in performance measure created by ROA.Robert N. (2007). Management Control Systems. McGraw-Hill New York.American Accounting Association Financial Accounting Standards Committee. (2003, June). Implications of Accounting Research for the FASBs Initatives on Disclosure of nurture about Intangible Assets. Accounting Horizons, 17, 175-185. Retrieved January 19, 2007 from ABI-Inform.http//0-proquest.umi.com.darius.uleth.ca80/pqdweb?did=356893801&sid=1&Fmt=3&clientId=12304&RQT=309&VName=PQDUpton, W.S. (2001, April). communication channel and Financial Reporting Challenges from the New Economy. FASB Financial Accounting Series redundant Report No. 219-A. Retrieved September 6, 2006 from