1. 20 Monitoring Performance in Cost, Profit and Investment Centers
C H A P T E R
Monitoring Performance in Cost, Profit and Investment Centers

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

3. Why do Performance Evaluation of Personnel and Divisions?

4. What Business Developments Have Occurred Because of These Changes?

5. 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

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

7. Define Responsibility Accounting and List Three Types

8. Define Cost Center

9. Define Profit Center

10. Define Investment Center

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

12. Step to Standard Costing
Steps

13. What is the General Model for Variance Analysis?12

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

15. What Does the Direct Materials Price Variance Measure?18

16. Materials Price Variance Assume the following results:
Actual results:
Direct materials purchased $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

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

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

19. What Does the Direct Materials Quantity Variance Measure?

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

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

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

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

24. Direct Labor Variances
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 $

25. 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

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

27. Journal Entries
Prepare labor rate and efficiency variances: xx 33

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

29. 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 , , ,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 , , ,000
Segment margin $ 13,500 $ 6,500 $ 8,000
Less company
indirect costs $ 4,000
Net income $ 9,500
Segment-margin ratio % 53.3%

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

31. Assume the following results:
Revenue Variances
Assume the following results:
Actual results:
Actual Sales $20.00
Actual Market Share %
Actual Market Volume ,000
Standard costs:
Standard Price $21.00
Standard Sales Volume ,800
Expected Market Share % $

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

33. 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

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

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

36. 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 =

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

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

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

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

41. 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 39

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

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

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

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

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