Performance Evaluation, Variable Costing, and Decentralization Management Accounting: The Cornerstone for Business Decisions Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Performance Evaluation, Variable Costing, and Decentralization Management Accounting: The Cornerstone for Business Decisions Copyright ©2006 by South-Western,
Dec 14, 2015
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Performance Evaluation, Variable
Costing, and Decentralization
Management Accounting: The Cornerstone for
Business Decisions
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Learning Objectives
1. Explain how and why firms choose to decentralize.
2. Explain the difference between absorption and variable costing. Prepare segmented income statements.
3. Compute and explain return on investment (ROI).
4. Compute and explain residual income and economic value added (EVA).
Learning Objectives
5. Explain the role of transfer pricing in a decentralized firm.
6. (Appendix) Explain the uses of the Balanced Scorecard and compute cycle time, velocity, and manufacturing cycle efficiency (MCE).
Comment on Decentralization and
Responsibility Centers
What are some reasons to decentralize?
Illustrate Centralization Vs. Decentralization
Illustration of PepsiCo's Decentralized Divisions
Match Definitions
Cost Center
Revenue Center
A responsibility center in which the manager is only accountable for sales
A responsibility center in which the manager is accountable for both revenues and costs
Investment Center
Profit Center
A responsibility center in which the manager is accountable for revenues, costs and investments
A responsibility center in which the manager is only accountable for costs
Complete the Chart
What type of accounting information is use for measuring performance?
Capital
Center Cost Sales Investment Other
Cost
Revenue
Profit
Investment
Differentiate Between Product and Period
Costs
Complete Chart
How are product and period cost classified under absorption and variable costing? Insert the word “Product” or “Period” were appropriate
Costing Method
Absorption Variable
Direct materials
Direct labor
Variable overhead
Fixed overhead
Selling expenses
Administrative expenses
How to compute inventory cost under absorption &
variable costing.During the most recent year, Fairchild
company had the following data associated with the product it makes.
Units in beginning inventory 0Units produced 12,000Units sold ($325 each) 10,000Variable costs per unit:
Direct materials $60Direct labor 90Variable overhead 60
Fixed costs:Fixed overhead per unit produced $25Fixed selling and administrative 100,000
11-1
REQUIRED:
1. How many units are in ending inventory?
2. Using absorption costing, calculate the per-unit product cost. What is the value of ending inventory?
3. Using variable costing, calculate the per-unit product cost. What is the value of ending inventory?
Calculations:
11-1
How to compute inventory cost under absorption &
variable costing.
How to compute inventory cost under absorption & variable
costing.11-1
2. Absorption costing 3. Variable costing
How to prepare income statements under
absorption & variable costing.
11-2
During the most recent year, Fairchild company had the following data associated with the product it makes.
Units in beginning inventory 0Units produced 12,000Units sold ($325) 10,000Variable costs per unit:
Direct materials $60Direct labor 90Variable overhead 60
Fixed costs:Fixed overhead per unit produced $25Fixed selling and administrative 100,000
REQUIRED:1. Calculate the cost of goods sold under
absorption costing2. Calculate the cost of goods sold under
variable costing3. Prepare an income statement under
absorption costing4. Prepare an income statement under
variable costingCalculation:
How to prepare income statements under
absorption & variable costing.
11-2
How to prepare income statements under
absorption & variable costing.
11-2
3. Fairchild Company
Absorption-Costing Income Statement
How to prepare income statements under
absorption & variable costing.
11-24. Fairchild Company
Variable-Costing Income Statement
Review the Relationships Between Production,
Sales & Income
IF THEN
1. Production > Sales
2. Production < Sales
3. Production = Sales
How to prepare a segmented income
statement.Audiomatronics, Inc., produces MP3 players and
DVD players in a single factory. The following information was provided for the following year.
MP3 Players DVD PlayersSales $400,000 $290,000Variable cost of good sold 200,000 150,000Direct fixed cost 30,000 20,000A 5% sales commission is paid for each of the two
product lines. Direct fixed selling and administrative expense was estimated to be $10,000 for the MP3 line and $15,000 for the DVD line.
Common fixed overhead for the factory was estimated at $100,000; common selling and administrative expense was estimated to be $20,000.
11-3
How to prepare a segmented income
statement.REQUIRED: Prepare a variable costing segmented income statement for Audiomatronics, Inc., for the coming year.
11-3
Calculation: MP3 Players DVD Players Total
Sales
Variable cost of goods sold
Variable selling expense
Contribution margin
Less: direct fixed expenses:
Direct fixed overhead
Direct sell & admin
Segment margin
Less: common fixed expenses
Common fixed overhead
Common sell & admin
Net income
List Three Ways Investment Centers are
Evaluated
Match Definitions
ROI
Ave. Operating Assets
Sales / Average operating assets
Operating income / Sales
Turnover
Margin
Operating income / Average operating assets
(Beginning net book value + Ending net book value) / 2
How to calculate average operating assets, margin,
turnover & ROI.Celimar Company’s Eastern Division earned
operating income of $60,000 on Sales of $600,000. At the beginning of the year the net book value of the assets were $305,700, while at the end of the year they were $354,300.
REQUIRED: For the Eastern Division calculate:
1. Average operating assets2. Margin3. Turnover4. ROI
11-4
Calculation:1. Average operating assets =
2. Margin =
3. Turnover =
4. ROI =
How to calculate average operating assets,
margin, turnover & ROI.11-4
What are three advantages of ROI?
How to calculate residual income.
Celimar Company’s Eastern Division earned operating income of $60,000 on Sales of $600,000. At the beginning of the year the net book value of the assets were $305,700, while at the end of the year they were $354,300. Celimar requires a minimum rate of return of 12%.
REQUIRED: For the Eastern Division calculate:
1.Average operating assets2.Residual incomeCalculation:
11-5
How to calculate EVA.11-6
Sales $600,000
Cost of goods sold 330,000
Gross Margin $270,000
Less: Sell & Admin Exp. 210,000
Operating income $ 60,000
Less: Income taxes @30% 18,000
Net income $ 42,000
Celimar Company’s Eastern Division earned net income last year as shown in the following income statement:
Total capital employed equaled $330,000. Celimar’s actual cost of capital is 10%.
REQUIRED: Calculate EVA for Eastern Division
Calculation:
How to calculate EVA.11-6
Discuss Transfer Pricing
Define the three ways to set transfer prices.
How to calculate transfer prices.
Omni, Inc., has a number of divisions, including Indigo Division, a producer of microcircuit boards and Lima Division a producer of controllers for heating and controlling manufacturers.
Indigo produces the bk-912 model that can be used by Lima Division in the production of its control systems for regulating heating and air conditioning systems. The market price of the bk-912 is $15 and the full cost is $8
REQUIRED:1. If Omni, Inc. has a transfer pricing policy that
requires transfer at full cost, what would the transfer price be? Do you suppose that Indigo and Lima would choose to transfer at that price?
11-7
2. If Omni, Inc. has a transfer pricing policy that requires transfer at market price, what would the transfer price be? Do you suppose that Indigo and Lima would choose to transfer at that price?
3. Now suppose that Omni, Inc., allows negotiated transfer pricing and that Indigo Division can avoid a $3 selling expense by selling to Lima Division. Which division sets the minimum transfer price, and what is it? Which division sets the maximum transfer price and what is it? Do you suppose that Indigo and Lima Divisions would choose to transfer somewhere in the bargaining range?
How to calculate transfer prices.11-7
Calculations:
How to calculate transfer prices.11-7
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