C H A P T E R 9 Evaluating Personnel and Divisions

Learning Objective 1 Explain why evaluating personnel and divisions is such an important activity in organizations.

Why do Performance Evaluation of Personnel and Divisions? 1.New technology has made information inexpensive. 2.Globalization 3.Concentration of power in certain market investors.

What Business Developments Have Occurred Because of These Changes? 1.Increased pace of the business world 2.Shorter product life cycles and competitive advantages 3.Requirements for better, quicker, and more decisive actions by management 4.New companies and industries 5.New professional services 6.Outsourcing 7.Greater uncertainty and recognition of risk 8.More complex business transactions 9.Increased focus on customer satisfaction

Learning Objective 2 Identify different kinds of organizational units in which evaluation occurs. Subsidiary Parent Subsidiary Plant 1 Plant 2 Dept. 1 Dept. 2

Segments: Parts of an organization requiring separate reports for evaluation by management. Decentralized company: Managers at all levels have authority to make decisions concerning the operations for which they are responsible. Centralized company: Top management makes the major decisions for every level rather than delegating decisions to managers at lower levels. Goal congruence: Selection of goals for each level that are consistent with those of the company as a whole. Define These Key Terms

Responsibility accounting is where a manager is held accountable for the costs, revenues, assets, or other elements over which he/she has control. Define Responsibility Accounting and List Three Types

Define Cost Center Manager has control over and is held accountable for costs.

Define Profit Center Manager has control over and is held accountable for both costs and revenues.

Define Investment Center Manager has control over and is held accountable for costs, revenues, and assets.

Learning Objective 3 Explain how performance is evaluated in cost centers.

Standard Costing 1.Develop standard costs. 2.Collect actual costs. 3.Compare actual costs to standard costs and identify variances. 4.Report results including the variances to the managers responsible for variances. 5. Analyze causes of significant controllable variances. 6. Take action to eliminate causes of variances. 7.Journalize actual costs, standard costs, and variances.

What is the General Model for Variance Analysis? (1) (2) (3) AQ x AP AQ x SP SQ x SP Price (Rate) Variances Materials price variance Labor rate variance Manufacturing overhead spending variance Quantity (Usage) Variances Materials quantity variance Labor efficiency variance Manufacturing overhead efficiency variance Price Variance + Quantity Variance Total Variance

What Does the Direct Materials Price Variance Measure? Materials Price Variance: The extent to which the actual price varies from the standard price for the quantity of materials purchased. I know how much I actually paid, but how much should I have paid?

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

Complete the Materials Price Variance (1) (2) (3) AQ x AP AQ x SP SQ x SP Price variance 5,000 x ($1.65 – $1.75) = $500 U Note:This variance is based on the quantity purchased. 5,000 x $1.75 = 5,000 x $1.65 = $8,750$8,250

Materials Price Variance (1) (2) (3) AQ x AP AQ x SP SQ x SP Price variance 4,200 x ($1.65 – $1.75) = $420 U Note:This variance is based on the quantity transferred to production. 4,200 x $1.75 = 4,200 x $1.65 = $7,350$6,930

What Does the Direct Materials Quantity Variance Measure? Materials quantity variance: The extent to which the actual quantity of materials used varies from the standard quantity. I know how much the standard cost is for what I actually used, but what should the cost have been had I used the standard materials for what I actually produced?

Materials Quantity Variance (1) (2) (3) AQ x AP AQ x SP SQ x SP Note: The standard quantity allowed is 4,000. Quantity variance $1.65 x (4,200 – 4,000) = $330 U 4,200 x $1.65 = 4,000 x $1.65 = $6,930 $6,600

Total Materials Variance (1) (2) (3) AQ x AP AQ x SP SQ x SP 4,200 x $1.75 = 4,200 x $1.65 = 4,000 x $1.65 = $7,350 $6,930 $6,600 Quantity variance $1.65 x (200) = $330 U Price variance 4,200 x ($0.10) = $420 U Total Materials Variance = $750 U

Prepare journal entries for materials variances: Materials price variance: Direct Materials Inventory ,250 Materials Price Variance Cash ,750 Purchase of materials entered at standard cost. Materials quantity variance: Work-in-Process Inventory ,600 Materials Quantity Variance Direct Materials Inventory.....6,930 Transferred materials to work-in-process. Journal Entries xx

Labor Rate Variance: The extent to which the actual labor rate varies from the standard rate for the quantity of labor used. Labor Efficiency Variance: The extent to which the actual labor used varies from the standard quantity. What Do the Direct Labor Variances Measure?$

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

Labor Rate Variance (1) (2) (3) AH x AR AH x SR SH x SR $ Labor rate variance 3,900 x ($5.20 – $5.00) = $780 U 3,900 x $5.20 = 3,900 x $5.00 = $20,280$19,500 Labor efficiency variance $5.00 x (4,000 – 3,900) = $500 F 4,000 x $5.00 = $20,000

What is the Total Labor Variance? (1) (2) (3) AH x AR AH x SR SH x SR 3,900 x $5.20 3,900 x $5.00 = 4,000 x $5.00 = $20,280$19,500 $20,000 Labor efficiency variance $5.00 x (4,000 – 3,900) = $500 F Labor rate variance 3,900 x ($5.20 – $5.00) = $780 U Total Labor Variance = $280 U

Prepare labor rate and efficiency variances: Journal Entries xx Work-in-Process Inventory ,000 Labor Rate Variance Labor Efficiency Variance Wages Payable ,280 To charge Work-in-Process Inventory for labor costs.

Learning Objective 4 Explain how performance is evaluated in profit centers.

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 ,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 %53.3% Segment-Margin Income Statement

Define These Key Terms Segment-margin ratio: The segment margin divided by the segment’s net sales revenue; a measure of the efficiency of the segment’s operating performance and, therefore, of its profitability. Segment margin: The difference between segment revenue and direct segment costs; a measure of the segment’s contribution to cover indirect fixed costs and provide profits. Indirect costs: Costs normally incurred for the benefit of several segments or activities. Direct costs: Costs that are specifically traceable to a unit of business or segment being analyzed.

Learning Objective 5 Explain how performance is evaluated in investment centers.

What is Return on Investment (ROI) and its Formula? ROI is a measure of operating performance and efficiency in utilizing assets; computed in its simplest form by dividing net income by total assets. Investment Center ROI Investment center income Investment center assets =

Return on Investment (ROI) How can components of ROI be separated? = X = X ROI Net income Total assets Net income Revenue Profit margin Revenue Total assets Asset turnover

Expanded Material Learning Objective 6 Compute and interpret variable overhead variances in cost centers.

 Total Variable Manufacturing Overhead Variance: The extent to which actual variable manufacturing overhead varies from the amount included in Work-in- Process Inventory. Define Each of These Manufacturing Overhead Variances  Variable Manufacturing Overhead Spending Variance: The difference between actual manufacturing overhead incurred and the standard manufacturing overhead for the actual activity level.  Variable Manufacturing Overhead Efficiency Variance: The difference between manufacturing overhead costs at actual hours and manufacturing overhead costs expected at standard hours.

Variable Overhead Elements Variable ManufacturingStandard Rate Overhead Items (per DL hour) Indirect materials $0.80 Indirect labor Other Total $2.00

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

(1) (2) (3) AH x AR AH x SR SH x SR Calculate Variable Manufacturing Overhead Variances Spending variance $8,800 – $7,800 = $1,000 U 3,900 x $2.00 = 4,000 x $2.00 = $8,800 $7,800 $8,000 Efficiency variance $2.00 x (4,000 – 3,900) = $200 F Total Variable Manufacturing Overhead Variance = $800 U