Cash, Short-term Investments and Accounts Receivable

Chapter 4 1

Cash, Short-term Investments

and Accounts Receivable

Chapter 4

Chapter 14Activity-Based Management and

Performance Measurement/Reward

Chapter 14 3

•Distinguish between value-added and non-value-added activities as part of activity-based management.

•Identify cost drivers of activities.

•Allocate costs using activity-based costing.

•Identify financial and nonfinancial performance measurements for different responsibility centers.

•Discuss the use of a balanced scorecard in performance evaluation.

•Align the use of rewards with the performance of measurement system.

Learning ObjectivesChapter 14

Chapter 14 4

MovingStorageSchedulingSet-upsWaitingInspectingRework

Research & DevelopmentEngineeringProduction

Value Added or Non Value Added

Chapter 14 5

Cost Drivers Cost Drivers

A cost driver is the factor that has a direct cause-effect relationship on a cost.

Examples include:Cost DriverDirect Materials Units producedMaintenance Expense Machine HoursSupervisor Salary Labor HoursInsurance Square Footage

Chapter 14 6

Activity Based CostingActivity Based Costing

Activity-based costing (ABC) is an overhead allocation

method.

(1)classifying costs into multiple levels of incurrence

(2) accumulating costs by cost drivers

(3) using cost drivers to assign costs to products and services.

(1)classifying costs into multiple levels of incurrence

(2) accumulating costs by cost drivers

(3) using cost drivers to assign costs to products and services.

Allocation Overhead: Traditional versus Activity-Based Costing

Chapter 14 7

Activity-Based Costing Example

Chapter 14 8

•Assume that Hyde, Inc. produces two products: •Product Q sells for $40 and has direct material and direct labor costs of $27. Product Q requires 2.5 labor hours.•Product R sells for $150 and has direct material and direct labor of $89. Product R requires 6 labor hours.•In 2009, Hyde produced and sold 70,000 units of Q and 8,000 units of R.•Total overhead for 2009 was $579,000.•The next slide illustrates Hyde, Inc.’s overhead allocation process using the traditional cost driver of direct labor hours.

Chapter 14 9

Hyde, Inc. Overhead Allocation (Traditional)

Activity-Based Costing Example

Chapter 14 10

•If Hyde, Inc. used activity-based costing, the overhead would be divided into groups, and each group would be applied using a different driver.•Assume that the $579,800 of total overhead consists of $240,000 in material movement costs, $189,000 in utilities, $126,800 in cleanup costs, and $24,000 in setup costs.•The next two slide indicate the overhead allocations to the two products if ABC were used.•We have four drivers and allocation bases, one for each overhead category.

Chapter 14 11

Hyde , Inc. Overhead Allocation (Activity-Based Costing)

Chapter 14 12

Hyde , Inc. Overhead Allocation (Activity-Based Costing)

Chapter 14 13

Overhead Cost ComparisonOverhead Cost Comparison

One Driver

ABC

Product Q

$6.50

$3.26

Product R

$15.60

$43.91

Chapter 14 14

Responsibility Centers

• Cost Center• Profit Center

• Investment Center

Chapter 14 15

Cost Center

•In a cost center, the only means to judge performance is an assessment of whether the center’s costs were in line with budgeted amounts.•Actual costs are compared to budgeted costs at the same level of activity to determine the variance amount.

Chapter 14 16

Cost Center Example

•Lee Larkind is the manager of the Reservations Department in HLS Corp.•For October, the department’s budget was as follows, based on an activity level of 480 hours (three people working 40 hours per week for four weeks in the month):

Chapter 14 17

Cost Center Example Continued

•During October, company management gave reservations employees a $0.50 per hour wage increase.•The employees worked a total of 500 hours, and the department reported the following costs:

Chapter 14 18

Cost Center Example Continued•At first glance, it appears that Larkind has not controlled departmental costs well during October.•However, the two sets of figures should not be compared directly because they have been calculated using different levels of activity.•The original budget first needs to be restated at the actual activity level of 500 hours before making the comparison.

Chapter 14 19

Profit Center•In a profit center, performance can be judged on both cost control and revenue generation.•A profit center manager’s goal is to maximize the center’s net income.•Performance evaluation in a profit center will also include revenue and profit measurements.•We can calculate two variances for a profit center.•The sales price variance is the difference between total actual selling price and budgeted selling price at actual volume.•The sales volume variance is the difference between budgeted selling price at actual volume and total budgeted sales.•The next slide shows the revenue variance model.

Revenue Variance Model

Chapter 14 20

Chapter 14 21

Revenue Center Example•Assume that the Reservations Department from our previous example is a profit center, rather than a cost center.•The Reservations Department charges the hotel $10 for each reservation generated by the department.•It was estimated that the department would make 2,000 reservations during October; thus, expected revenue for the department was $20,000.•In October, the department actually generated 2,200 reservations. During the month, a new reservation system was implemented that reduced the work involved; therefore, the hotel charge per reservation was lowered to $9.50.•Price, volume, and revenue variances for October are shown on the next slide.

Chapter 14 22

Revenue Center Example Continued

Budgeted profits for the Reservations Department should also be compared to actual profits in evaluating performance as follows:

Chapter 14 23

Investment Center•In an investment center, performance can be judged on the basis of cost control, revenue generation, and return on investment.•Center managers can acquire, use, and sell plant assets to earn the highest rate of return on the center’s asset base.•In addition to the measures shown previously for cost and profit centers, an investment center’s performance can also be measure by calculating return on investment (ROI).

ROI = Income Assets

Investment Center Example

Chapter 14 24

•Assume that Larkind of the Reservations Department has control over the department’s asset base of $50,000.•Using the actual income of $5,075, ROI is computed as:

Chapter 14 25

Du Pont ModelDu Pont Model

Profit Margin = Income RevenuesAsset Turnover = Revenues ÷ Assets

ROI = Profit Margin - Asset Turnover

Du Pont Model Example

Chapter 14 26

Using the information from the Reservations Department, we can use the Du Pont model of ROI.

Chapter 14 2727

a. $100,000

b. $200,000

c. $250,000

d. $500,000

During the past twelve months, the McDonald Company had a net income of $50,000. What is the amount of assets if the return on investment is 20%?

Chapter 14 2828

a. $100,000

b. $200,000

c. $250,000

d. $500,000

During the past twelve months, the McDonald Company had a net income of $50,000. What is the amount of assets if the return on investment is 20%?

Chapter 14 2929

a. increasing assets.

b. decreasing assets.

c. decreasing revenue.

d. both (b) and (c).

Return on investment can be increased by

Chapter 14 3030

a. increasing assets.

b. decreasing assets.

c. decreasing revenue.

d. both (b) and (c).

Return on investment can be increased by

Chapter 14 31

Museum Corporation uses the investment center concept for the museums that it manages. Select operating data for three of its museums for 2010 are as

St. Louis Dallas Miami

Revenue $600,000 $750,000 $900,000

Assets 300,000 250,000 350,000

Net income 51,000 56,000 59,000

a. Compute the return on investment for each division.b. Which museum manager is doing best based on ROI?

Why?

Chapter 14 32

a. ROI St. Louis = $51,000/$300,000 = 17% ROI Dallas = $56,000/$250,000 = 22% ROI Miami = $59,000/$350,000 = 17%b. Dallas is generating $.22 of income for every $1.00 of

assets. The St. Louis and Miami museums are only generating $.17 per $1.00 of assets.

Chapter 14 33

Balanced ScorecardBalanced Scorecard

•Financial•Customer•Internal Process•Learning and Growth

Balanced Scorecard Illustration

Chapter 14 34

Balanced Scorecard Illustration Continued

Chapter 14 35

•Each balanced scorecard section should indicate specific measurements that would help assess the organization’s process toward its long-run goals and objectives.•The measurements should be easy to understand and to compute.•The following slide shows some examples of nonmonetary measurements for each scorecard area other than the financial section.

Balanced Scorecard Nonmonetary Measurements

Chapter 14 36

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a. learning and growth

b. customer

c. government

d. financial

The balanced scorecard measures an organization’s performance from all of the following perspectives except:

Chapter 14 3838

a. learning and growth

b. customer

c. government

d. financial

The balanced scorecard measures an organization’s performance from all of the following perspectives except:

Chapter 14 3939

a. percentage of employees retained

b. market share

c. number of patents obtained

d. hours of training per employee

Measures of the balanced scorecard’s customer perspective include:

Chapter 14 4040

a. percentage of employees retained

b. market share

c. number of patents obtained

d. hours of training per employee

Measures of the balanced scorecard’s customer perspective include:

Chapter 14 41

Activity-based management (ABM) is concerned with the activities performed during the manufacturing or service process and the related costs of those activities.

Activity-based management (ABM) is concerned with the activities performed during the manufacturing or service process and the related costs of those activities.

• Analyzing Activities• Identification• Value or Non Value Added• Activity Costs

• Analyzing Activities• Identification• Value or Non Value Added• Activity Costs

Activity-Based Management

Chapter 14 42

MotivationMotivation

BenchmarkingPerformance MeasurementRewards:

FinancialNon Financial

BenchmarkingPerformance MeasurementRewards:

FinancialNon Financial

Chapter 14 43

Choice of Performance Measures

Chapter 14 44

Conclusions• Activities Drive Costs•ABC Provides More Accurate Information•A Performance Measurement System Allows Activities to be monitored and rewarded.•Success is Judged by Financial and Non Financial Measures

• Activities Drive Costs•ABC Provides More Accurate Information•A Performance Measurement System Allows Activities to be monitored and rewarded.•Success is Judged by Financial and Non Financial Measures

Chapter 14 454545

THE END!