INSTITUTE OF MANAGEMENT TECHNOLOGY

POST GRADUATE DIPLOMA IN MANAGEMENT

DUAL COUNTRY PROGRAM
TERM: II
SUBJECT: MANAGERIAL ACCOUNTING
(BATCH: 2014-16)

Assignment: Apple Divisional Performance Measurement

Submitted by Group 8 (Section B)

Mayank Jain (140201076)
Prateek Dhar Sharma (140201099)
Prateek Kanchan (140201100)
Pratyush Haridwaj (140201101)
Rajat Upadhyaya (140201110)

Submitted toDr. Anupam Mehta

Contents

Introduction..3
Objective ..3
Apple Overview...........4
Division of Segments in Apple5
Divisional Performance Measurement6
Comparison of Segments7
Conclusion...10
References

INTRODUCTION
Decentralization enables the performance of the company as a whole to function. The small units
go hand in hand benefiting the organization. In this report, we analyzed the company like Apple
for understanding the effectiveness of divisions. The tools applied for this analysis are Return on
Investment and Residual Income.
Objective: To develop performance measurement systems for divisions that are significant
investment centers in Apple.
As a special case of decentralization, divisionalization represents the concept of delegated profit
and, to some extent, investment responsibility. Divisions usually perform many of the basic
business functions themselves planning, production, accounting, marketing, and some
financing activities.
Primary approaches to divisional performance measures.

Return on investment (ROI)

Definition: Return on investment is income from operations or some other measure of
return dividend by: (1) total operating assets, (2) total operating assets less current
liabilities, or (3) net operating assets.
(1) ROI (total assets) =

Return

Sales

(2) ROI (net assets) =

Return

Sales
Total assets

Sales

Sales
Total assets

Total assets
Net assets

Residual Income (RI)

Definition: Residual income is net operating income or net after-tax earnings plus
interest (net of the tax effect) less the desired rate of return on investment multiplied by
the amount of investment.

Economic Value Added (EVA)

Definition: A measure of a company's financial performance based on the residual wealth
calculated by deducting cost of capital from its operating profit (adjusted for taxes on a
cash basis).
The formula for calculating EVA is as follows:

= Net Operating Profit after Taxes (NOPAT) - (Capital * Cost of Capital)

APPLE OVERVIEW
Apple Inc. is an American multinational corporation headquartered in Cupertino, California, that
designs, develops, and sells consumer electronics, computer software, online services, and
personal computers. On September 2013, Apple become the worlds most valuable brand in the
Omnicom groups best global brands report. As of June 2014, Apple maintains 425 retail stores
in fourteen countries, as well as the online Apple store and iTunes store, the latter of which is the
worlds largest music retailer. Apple is the largest publicly traded corporation in the world by
market capitalization, with an estimated market capitalization of $446 billion by January 2014.
As of Q1 2014, Apples five-year growth average is 39%for top line growth and 45% for bottom
line growth. In May 2013, Apple entered the top ten of the Fortune 500 list of companies for the
first time, rising 11 places above its 2012 ranking to take the sixth position. According to the
2014 edition of the Interbrand best global brands report, Apple is the worlds most valuable
brand, with a valuation of US$ 118.9 billion. According to the Boston Consulting group 50
most innovative companies ranking, Apple is also the worlss most innovative brand in 2014.
Apple occupies this rank since 2005.

2013:

Apple powers all its data centers, including a new facility in Reno, Nevada, with 100 percent
renewable energy and reaches 94 percent renewable energy usage across its corporate campuses
and data centers.

Apple begins construction of its new Cupertino campus, which will be a model of energy
efficiency and green building design.

Apple launches the Clean Water Program pilot to increase water reuse and recycling at 13
water-intensive supplier sites.

Apple introduces the new Mac Pro, which uses 74 percent less aluminium and steel than
its predecessor.

Apple launches the Supplier Environment, Health, and Safety (EHS) Academy to expand the
pool of qualified EHS managers in our supply chain.

Apple completes its rollout of PVC-free cables in China across all products.

DIVISION OF SEGMENTS IN APPLE

The Company manages its business primarily on a geographic basis. Accordingly, the Company
determined its reportable operating segments, which are generally based on the nature and
location of its customers, to be the Americas, Europe, Greater China, Japan, Rest of Asia Pacific
and Retail.

The Americas segment includes both North and South America.

The Europe segment includes European countries, as well as India, the Middle East and
Africa.
The Greater China segment includes China, Hong Kong and Taiwan.
The Rest of Asia Pacific segment includes Australia and Asian countries, other than those
countries included in the Companys other operating segments.

The Retail segment operates Apple retail stores in 13 countries, including the U.S. Retail
segment is an operating segment, but since maximum business focus is given on Geographic
segment the results of the Companys geographic segments do not include results of the Retail
segment. Each operating segment provides similar hardware and software products and similar
services.
DIVISIONAL PERFORMANCE MEASUREMENT
The Return on investment for Apple for three years i.e 2011,2012 and 2013 is calculated. The net
sales for all the three years were increasing and the investments also increased simultaneously.
But the return on investment changed fro year to year. We could see fluctuations in it. The
following figures and graph depicts the ROI of Apple for three years.

ROI
25.00

23.70

22.28

20.00
17.89
15.00
ROI

10.00
5.00
0.00
2013

2012

2011

ROI increased in 2012 and decreased in 2013 by 25% approximately. This might be due to the
bad performance in few segments of Apple.

COMPARISON OF SEGMENTS
As we know the segments of Apple are based on geographic segments, the analysis of these
segments is as follows:
America:

The ROI for three years is calculated for this segment. We assumed that amount invested in this
company is the total assets given in the financial statements. The trend shows that return on
invetsment in this segment is nearly 3.5 to 4. This means the returns is quadripled of
investments.

Europe:

The ROI in this segment is around 4. In 2012, it is 5 and it increased the overall ROI in that year.
China:

This segment also contributed for good ROI in 2012. It gave 7 times the investment as returns.
Asia Pacific:

ROI in 2013 is 4. It decreased from 5 to 4.

Japan:

ROI is 2 in 2013. It is 3 in 2012. The returns increased and decreased.

The other segment that is not classified in the geographical divisions is Retail.
Retail:

The reatil stores ROI varied from 1 to 1.7. In 2012, it was 1.7. It decreased from 1.7 to 1.2 in
2013.
Segments that are performing well are America, Europe and Great China in terms of ROI.
The Residual Income for these segments is calculated, with few assumptions. The calculations
are given below.
Assumtions made to calculated Weighted Average Cost of Capital is as follows:

America and Europe Segment Residual Income:

The income generated in these segments after removing PAT without the Interest is depicted in
RI. This is reduced from 2012 to 2013 in these two segments.
Great China and Japan:

In Japan, the RI kept on increasing and in China it declined from 2012 to 2013.
Rest of Asia Pacific and Retail :

The trend of RI in these two segments decreased from 2012 to 2013.

Analysis of ROI and RI of these segments:

On an overall basis for the year 2013, the investment incresed by 30,000 billion dollars. The net
sales increased by 15000 billion dollars. The investments are divided into different segments and
corporate assets were included in total assets. These were reflected in few segments.China
segment saw a decline by 50% approximately. Thus the residual income also reduced.
CONCLUSION
The company has done well from 2011 to 2012 in terms of ROI(Return on Investment) and
RI(Residual Income). But from 2012 to 2013, there has been a significant decline in both RI and
ROI because of more proportionate increase in assset than of increase in profit. The results
indicate the decline may be caused due to no much new value addition in Apple phones after
iphone 5s.That might show people preference changed to other smart phones in widening market
of technology devices.

References:
http://investor.apple.com/secfiling.cfm?filingid=1193125-13-416534&cik=320193
http://www.apple.com/
http://classes.bus.oregonstate.edu/spring07/ba422/Management%20Accounting%20Chapter%2022.htm
http://www.cimaglobal.com/Thought-leadership/Research-topics/Management-and-financialaccounting/Divisional-performance-measurement-an-examination-of-the-potential-explanatoryfactors1/