Managerial Accounting: An Introduction To Concepts, Methods, And Uses Chapter 10 Profit Center Cost Center Performance Evaluation Maher, Stickney and Weil

Learning Objectives (Slide 1 of 2)  Explain the reasons for conducting variance analyses.  Describe how to use the budget for performance evaluation.  Identify the different types of variances between actual results and the flexible budget.  Assign responsibility for variances.  Describe the role of variance analysis in service organizations.

Learning Objectives (Slide 2 of 2)  Explain the difference between price and efficiency variances.  Identify the relation between actual, budgeted and applied fixed manufacturing costs.  Explain why an effective performance measurement system requires employee involvement.  Explain how to compute the mix variance (Appendix 10.1)

Discuss Responsibility For Variances

Marketing Variances (Slide 1 of 4)  Marketing is usually assigned responsibility for what?  Sales volume variance measures the impact on profits when sales volume is different from what was expected

Marketing Variances (Slide 2 of 4)  It is essentially a contribution margin variance equal to: Budgeted contribution margin per unit Times: (Budgeted - Actual Sales volume) = Sales Volume Variance  Note that standard variable cost is used to compute contribution margin to avoid mixing cost variances with the effect of sales volume

Marketing Variances (Slide 3 of 4)  Variable marketing cost variances might be the result of incorrect amounts paid for sales commissions, shipping, etc.  Accountants would investigate variances resulting from bookkeeping adjustments or errors  Management would investigate marketing activities which may have caused variances

Marketing Variances (Slide 4 of 4)  Fixed marketing costs are often discretionary  A favorable variance does not always indicate good performance  For example, favorable variance might mean the company advertised less than planned; not necessarily good

Review Administration Variances

Draw the model for computing price and efficiency variances

What are some reasons for variances?

Why do service organizations perform variance analysis?

Beyond the Numbers  Firms have traditionally relied on financial measures to evaluate employee performance  Recently, companies have begun using nonfinancial performance measures  Used to direct employees’ attention to what they can control

Beyond the Numbers (Cont.)  Performance evaluation begins with understanding an organization’s goals  Develop measures to evaluate performance in achieving those goals

Performance Evaluation: The Process (Slide 1 of 2)  Define Continuous improvement continuously reevaluating and improving efficiency of activities by:  Improving activities through documentation and understanding  Eliminating activities that do not add value  Improving efficiency of activities that do add value

Performance Evaluation: The Process (Slide 2 of 2) Define Competitive benchmarking

Discuss Performance Evaluation: The Measures (Slide 1 of 5)

Performance Evaluation: The Measures (Slide 2 of 5)  Functional performance measures- efficiency of functional activities affects overall performance of organization  Appropriate functional performance measures depend on the type of activity

Performance Evaluation: The Measures (Slide 3 of 5)  Example: Forecasting quality  Percent error in sales forecast  Usefulness of forecasts to decision makers  Time Measures  Product cycle time - total time to produce a good or provide a service

Performance Evaluation: The Measures (Slide 4 of 5)  As cycle time increases, so do costs of processing, inspection, moving, and storage  Product cycle efficiency is calculated as follows: ___ Processing Time ___________ (Processing Time + Moving Time + Storing Time + Inspection Time)  The higher the percentage, the less time and money spent on non-value-added activities

Performance Evaluation: The Measures (Slide 5 of 5)  Environmental performance - by measuring environmental performance, firms hope to provide incentives for employees to help create a clean environment  Example: a performance measure to track waste minimization is: Waste Ratio (%) = Waste (in pounds) Total Output (in pounds)

Review Employee Involvement (Slide 1 of 2)

Review Employee Involvement (Slide 2 of 2)

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