C H A P T E R 6 Monitoring Performance in Cost, Profit and Investment Centers.

C H A P T E R 6

Monitoring Performance in Cost, Profit and Investment Centers

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

Subsidiary

Plant 1 Plant 2 Dept. 1 Dept. 2

Segments:

Decentralized company:

Centralized company:

Goal congruence:

Define These Key Terms

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

1.

2.

3.

4.

5.

6.

7.

What is the General Model for Variance Analysis?

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?

Assume the following results:Actual results:Direct materials purchased. . . . . . .5,000 @ $1.75Direct materials used . . . . . . . . . . . 4,200Units produced . . . . . . . . . . . . . . . . 2,000

Standard costs:Purchase price . . . . . . . . . . . . . . . $1.50Freight. . . . . . . . . . . . . . . . . . . . . . 0.10Handling costs . . . . . . . . . . . . . . . 0.05

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

Materials Price Variance

(1) (2) (3) AQ x AP AQ x SP SQ x SP

What Does the Direct Materials Quantity Variance Measure?

Materials Quantity Variance

(1) (2) (3) AQ x AP AQ x SP SQ x SP

Total Materials Variance

(1) (2) (3) AQ x AP AQ x SP SQ x SP

Prepare journal entries for materials variances:

Materials price variance:

Materials quantity variance:

Journal Entries

xxxx

Labor Rate Variance:

Labor Efficiency Variance:

What Do the Direct Labor Variances Measure?

$$

Assume the following results:

Actual results:Direct labor hours worked. . . . . . 3,900 @ $5.20Units produced . . . . . . . . . . . . . . . 2,000

Standard costs:Standard labor rate. . . . . . . . $5.00Standard hours per unit . . . . 2

$$

Direct Labor Variances

Calculate Labor Rate and Efficiency Variances $$

(1) (2) (3) AH x AR AH x SR SH x SR

What is the Total Labor Variance?

(1) (2) (3) AH x AR AH x SR SH x SR

Prepare labor rate and efficiency variances:

Journal Entries

xxxx

Learning Objective 5

Use revenue variance analysis to explain how performance is controlled in profit centers

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

Segment-MarginIncome Statement

Define These Key Terms

Segment-margin ratio:

Segment margin:

Indirect costs:

Direct costs:

Assume the following results:

Actual results:Actual Sales . . . . . . . . . . . . . . . . . 2,000 @ $20.00Actual Market Share . . . . . . . . . . 10%Actual Market Volume . . . . . . . . 20,000

Standard costs:Standard Price. . . . . . . . $21.00Standard Sales Volume . . . . 1,800Expected Market Share . . . . . . 12% $$

Revenue Variances

What are the sales price and sales volume variances?

(1) (2) (3) AQ x AP AQ x SP SQ x SP

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 shrx Standard price x SP x SP

Learning Objective 6

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

Net Income

Total Average Assets

Revenue

Total Average Assets

=X

Explain Residual Income (RI)

What is the formula for Residual Income?

Expanded MaterialLearning Objective 7

Compute and interpret variable overhead variances.

Total Variable Manufacturing Overhead Variance:

Define Each of These Manufacturing Overhead

Variances

Variable Manufacturing Overhead Spending Variance:

Variable Manufacturing Overhead Efficiency Variance:

Variable Overhead Elements

Variable Manufacturing Standard Rate Overhead Items (per DL hour)

Indirect materials. . . . . . . . . . . . . $0.80Indirect labor . . . . . . . . . . . . . . . . 0.70Other . . . . . . . . . . . . . . . . . . . . . . 0.50

Total . . . . . . . . . . . . . . . . . . . . . $2.00

Accounting forVariable Overhead

Units produced. . . . . . . . . . . . . . . . . 2,000Direct labor hours used . . . . . . . . . . 3,900Standard 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

(1) (2) (3) AH x AR AH x SR SH x SR

Calculate Variable Manufacturing Overhead Variances

Expanded MaterialLearning Objective 8

Compute and interpret fixed overhead variances.

Assume the following results:

Actual results:Actual Fixed Overhead. . . . . . $178,920Actual Production . . . . . . . . . . 45,000 DLH

Standard costs:Fixed Overhead ApplicationRate $4/DLHExpected production of 46,000 DLH

Fixed Overhead Variances

(1) (2) (3) Actual Budget SHA x SR Amount

Calculate Fixed Manufacturing Overhead Variances

Chapter 6 Managerial Accountingis Finished