Du Pont control chart:
Origin –
A system for management control has been designed which is popularly known as the Du Pont Chart system of control. This system utilizes the ratio inter-relationships to provide an important series of charts and indicators calling management’s attention to desirable and undesirable trends of corporate performance. Once a company has developed standards of performance regarding the various ratios, it becomes easy to judge performance changes with such a system.
Objective –
An important objective of the Du Pont system is to isolate the elements entering into the final figure in order to appraise the individual factors affecting performance.
Meaning –
It may be noted that the analytical chain in this chart is developed along two tiers –
The first sequence starts with turnover, determined by dividing sales by total investment; total investment represents current assets plus net fixed assets. Current assets include inventories, accounts receivables and cash.
In the second tier, the sequence starts with earnings as a percentage of sales, calculated by dividing earnings by sales; earnings equal sales less cost of sales, and cost of sales includes cost of goods sold, selling expenses, administrative and general expenses.
Use –
The chart provides management with an overall perspective of the financial relationships leading to the earnings rate on investment. Changes in any important segment of this structure will influence the final investment returns. The two-tier approach concentrates attention on the separate forces contributing to profits. Improvement can be accomplished either through more effective use of available capital, measured by the turnover sequence or through a better relationship between sales and costs, measured by the profit margin sequence. The same rate of return is achieved by either a low profit margin and high turnover or a high margin and low turnover.
For providing standards of evaluation, calculations are made of the ratios of return on investment, assets turnover and profit margins for comparable companies. Appropriate breakdowns can also be established for individual units within the same organization for internal comparisons.
The return on investment has been used as a measure of performance and a means of evaluating alternative investment opportunities. However, the approach is rearward and the data from which the ratio is calculated are applicable to specific past periods. To be consistent, it is necessary that the earnings in the numerator of the ratio should flow from the investment base used in the denominator. But, in practice, this consistency is not usually observed.
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