Shervonne Thomas is the controller at a large manufacturing company located in Chesterﬁeld, Virginia. The company has several divisions that evaluate their performance using a return on investment (ROI) formula (calculated by dividing profit by the book value of total assets).
In a meeting with the company president, Shervonne warned that ROI might not accurately reﬂect each division’s performance. Shervonne is concerned that managers might be too focused on short-term results.
The president asked Shervonne to identify a better way to evaluate each division’s performance. Shervonne told the president that the company allocates a lot of overhead costs to the divisions on what some managers consider an arbitrary basis. She agreed to discuss this problem with the managers and to get back to the president very soon.
a. Explain what managers can do in the short run to maximize return on investment. What other accounting measures could the company use to evaluate the performance of its divisional managers?
b. Describe other instances in which accounting numbers might lead to dysfunctional behavior in an organization.
c. Search the Internet and ﬁnd at least one company that offers an information system (or software) that might help Shervonne and the managers do a better job of evaluating performance.