20 Monitoring Performance in Cost, Profit and Investment Centers C H A P T E R Monitoring Performance in Cost, Profit and Investment Centers

Learning Objective 1 Explain why control is such an important activity in the management process

Why do Performance Evaluation of Personnel and Divisions?

What Business Developments Have Occurred Because of These Changes?

Learning Objective 2 Describe the responsibility accounting concept and identity three types of organizational control units Subsidiary Parent Plant 1 Plant 2 Dept. 1 Dept. 2

Define These Key Terms Segments: Decentralized company: Goal congruence:

Define Responsibility Accounting and List Three Types

Define Cost Center

Define Profit Center

Define Investment Center

Learning Objective 3 Describe standard costing and the basic variance analysis model.

Step to Standard Costing Steps

What is the General Model for Variance Analysis? 12

Learning Objective 4 Use materials and labor cost variance analysis to explain how performance is controlled in cost centers.

What Does the Direct Materials Price Variance Measure? 18

Materials Price Variance Assume the following results: Actual results: Direct materials purchased. . . . . . .5,000 @ $1.75 Direct materials used . . . . . . . . . . . 4,200 Units produced . . . . . . . . . . . . . . . . 2,000 Standard costs: Purchase price . . . . . . . . . . . . . . . $1.50 Freight. . . . . . . . . . . . . . . . . . . . . . 0.10 Handling costs . . . . . . . . . . . . . . . 0.05 Standard material cost per unit . $1.65

Complete the Materials Price Variance (1) (2) (3) AQ x AP AQ x SP SQ x SP 21

Materials Price Variance (1) (2) (3) AQ x AP AQ x SP SQ x SP 21

What Does the Direct Materials Quantity Variance Measure?

Materials Quantity Variance (1) (2) (3) AQ x AP AQ x SP SQ x SP 21

Total Materials Variance (1) (2) (3) AQ x AP AQ x SP SQ x SP 24

Journal Entries Prepare journal entries for materials variances: xx Materials price variance: Materials quantity variance:

What Do the Direct Labor Variances Measure? Labor Rate Variance: Labor Efficiency Variance: $ 27

Direct Labor Variances Assume the following results: Actual results: Direct labor hours worked. . . . . . 3,900 @ $5.20 Units produced . . . . . . . . . . . . . . . 2,000 Standard costs: Standard labor rate. . . . . . . . $5.00 Standard hours per unit . . . . 2 $

Calculate Labor Rate and Efficiency Variances $ Calculate Labor Rate and Efficiency Variances (1) (2) (3) AH x AR AH x SR SH x SR 21

What is the Total Labor Variance? (1) (2) (3) AH x AR AH x SR SH x SR 21

Journal Entries Prepare labor rate and efficiency variances: xx 33

Learning Objective 5 Use revenue variance analysis to explain how performance is controlled in profit centers Revenues Costs

Segment-Margin Income Statement Total Segment A Segment B Net sales revenue. . . . . . . $50,000 $35,000 $15,000 Variable costs: Cost of goods sold . . . . . . $30,000 $25,000 $ 5,000 S&A costs. . . . . . . . . . . . . 3,000 2,000 1,000 Total variable costs . . . . $33,000 $27,000 $ 6,000 Contribution margin. . . . . $17,000 $ 8,000 $ 9,000 Less fixed costs controllable by segment managers. . . . 3,500 1,500 1,000 Segment margin . . . . . . . $ 13,500 $ 6,500 $ 8,000 Less company indirect costs. . . . . . . . . $ 4,000 Net income. . . . . . . . . . . . $ 9,500 Segment-margin ratio. . . . 18.6% 53.3%

Define These Key Terms Direct costs: Indirect costs: Segment margin: Segment-margin ratio:

Assume the following results: Revenue Variances Assume the following results: Actual results: Actual Sales . . . . . . . . . . . . . . . . . 2,000 @ $20.00 Actual Market Share . . . . . . . . . . 10% Actual Market Volume . . . . . . . . 20,000 Standard costs: Standard Price. . . . . . . . $21.00 Standard Sales Volume . . . . 1,800 Expected Market Share . . . . . . 12% $

What are the sales price and sales volume variances? (1) (2) (3) AQ x AP AQ x SP SQ x SP 21

What are the market share and industry volume variances? Actual market volume Actual mkt. vol. Exp. mkt vol. x Actual market share x Expected mkt. shr x Exp mkt shr x Standard price x SP x SP 21

Learning Objective 6 Assets Revenues Costs Use ROI and residual income analysis to explain how performance is controlled in investment centers

What is Return on Investment (ROI) and its Formula?

ROI as used by the DuPont Management Team Investment Center ROI Investment center income Investment center assets = Divided ROI into management performance components (profit margin) and asset turnover ratios Profit Margin X Asset Turnover = ROI Net Income Revenue Revenue Total Average Assets Net Income Total Average Assets X =

Explain Residual Income (RI) What is the formula for Residual Income?

Expanded Material Learning Objective 7 Compute and interpret variable overhead variances.

Define Each of These Manufacturing Overhead Variances Total Variable Manufacturing Overhead Variance: Variable Manufacturing Overhead Spending Variance: Variable Manufacturing Overhead Efficiency Variance: 37

Variable Overhead Elements Variable Manufacturing Standard Rate Overhead Items (per DL hour) Indirect materials. . . . . . . . . . . . . $0.80 Indirect labor . . . . . . . . . . . . . . . . 0.70 Other . . . . . . . . . . . . . . . . . . . . . . 0.50 Total . . . . . . . . . . . . . . . . . . . . . $2.00 38

Accounting for Variable Overhead Units produced. . . . . . . . . . . . . . . . . 2,000 Direct labor hours used . . . . . . . . . . 3,900 Standard direct labor hours . . . . . . . 4,000 Actual variable overhead costs: Indirect materials. . . . . . . . . . . . . . $ 3,200 Indirect labor . . . . . . . . . . . . . . . . . 2,600 Other . . . . . . . . . . . . . . . . . . . . . . . 3,000 Total variable overhead costs. . . . . . $ 8,800 39

Calculate Variable Manufacturing Overhead Variances (1) (2) (3) AH x AR AH x SR SH x SR 42

Expanded Material Learning Objective 8 Compute and interpret fixed overhead variances.

Fixed Overhead Variances Assume the following results: Actual results: Actual Fixed Overhead. . . . . . $178,920 Actual Production . . . . . . . . . . 45,000 DLH Standard costs: Fixed Overhead Application Rate $4/DLH Expected production of 46,000 DLH

Calculate Fixed Manufacturing Overhead Variances (1) (2) (3) Actual Budget SHA x SR Amount 42

Chapter 6 Managerial Accounting is Finished I like the dreams of the future better than the history of the past. Thomas Jefferson