@Seattle – I stayed up till 4am last night working on a reply to this – I'm a schmuck – day was ruined, but all in good intention 🙂 The question is valid, and is a great SIM topic given the cross reference of various areas within BEC:
In simplest terms, Management's job is to maximize shareholder value . In performing that job management utilizes various models and frameworks ( COSO ERM and the Internal Control Process) which outline additional objectives and goals. Among those main objective is Efficiency of Operations ( Both financial and non-financial), Balancing Risk and Return, Compliance with laws, and in doing so shareholder value is maximized. Ideally, Management must provide reasonable assurance about the achievement of the Entity's objectives ( See COSO ).
Operating Leverage and its counterpart Financial Leverage, both capital budgeting techniques, are measures of efficiency vis-a-vis the resource used and transcend into the optimal capital structure of the firm, that's working capital management( a key duty of Management); I.e. Fixed Cost or Debt, What Industry are we in and what is the norm. Finally how does our combination of FL & OL (which btw can be cross multiplied) affect our next objective, the Optimal capital structure?
Operating Efficiency deals with our performance measures, both financial and non-financial. Here we transcend into Asset Utilization, how well are we utilizing our resources ( those fixed costs, that debt, those variable costs). The fundamentals thrust here is that FL & OL flow into ROI measures. Are we at the optimal capital structure where the risks we are willing to take are balanced with the returns on investment we expect? Are our Inventory levels optimal?
If Barelystayingsane cross references those terms within the BEC module, reads again coso erm and COSO Internal Control and draws out the formulas of FL, OL ROI, etc as a flow chart he will see how you the two affect one another.
Also, if you are still not convinced, I found the MCQ which solidifies the connection as a rule
CPA-04244
Micro Manufacturers uses a performance reporting system that combines both financial and
non financial measures to evaluate division performance. All of the following measure operational
efficiency, except:
a. Operating leverage.
b. Days' sales in accounts receivables.
c. Inventory Turnover
d. Residual income.
Explanation
Choice “d” is correct. Residual income measures profitability in excess of a target rate of
return. Operational efficiency is not considered.
Choices “a”, “b”, and “c” are incorrect. Operating leverage, days' sales in accounts
receivable, and inventory are all measures of operational efficiency, specifically, efficiency in
managing working capital.
Good Luck.
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