Question

BTN 22-7 Aman Advani, Gihan Amarasiriwardena, and Kit Hickey’s company Ministry sells men’s clothes and is organized by different product lines (departments).

Required

1. How can Ministry use departmental income statements to assist in understanding and controlling operations?

2. Are departmental income statements always the best measure of a department’s performance? Explain.

3. Provide examples of nonfinancial performance indicators Ministry might use as part of a balanced scorecard system of performance evaluation.

Short answer

1. Departmental income statement helps in the identification of areas needing improvement.
2. Specified reporting helps inreviewing the performance of different departments individually.
3. Non-financial performance indicatordoes not consider monetary values in determining performance.

Step-by-step solution

Step-by-Step SolutionStep 1: Definition of Performance Indicators

Performance indicators can be defined as the different aspects that reflect the performance of the business entity. It includes aspects such as net income, customer retention, customer ratings, and turnover of the business entity.

Use of departmental income statement to assist in understanding and controlling operations

Departmental income statement reports the income and expenses of different departments separately, allowing the managers to evaluate each department separately. It reflects the contribution made by each department and, therefore, distinguishes between the performance of the departments. It helps control areas where unnecessary costs are incurred by the business entity and the departments that are not generating profit for the business entity.

Departmental income statements as a measure of performance

Departmental income statement reports expenses and revenue related to a specific department and, therefore, provides the best measure to assess the department’s performance. Such an income statement helps review the department’s performance and its managers.

Non-financial performance indicator

Business entities can also use customer ratings as a non-financial performance indicator. The customers of the business entity provide ratings to the product and company, based on the product and after-sales services provided by the company. This will help evaluate the quality of the product and service provided by the business entity.