Chapter Fifteen PowerPoint Presentation, PPT - DocSlides

alexa-scheidler | 2018-01-12 | General Performance Evaluation. © 2015 McGraw-Hill Education.. An accounting system that. provides information . . . . Responsibility Accounting. Relating to the. responsibilities of. individual managers..

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Slide1

Chapter Fifteen

Performance Evaluation

© 2015 McGraw-Hill Education.

Slide2

An accounting system thatprovides information . . .

Responsibility Accounting

Relating to the

responsibilities of

individual managers.

To evaluate

managers on

controllable items.

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2

Slide3

Decentralization

Improves qualityof decisions.

Encourages upper-level management toconcentrate on strategic decisions.

Improvesproductivity.

Developslower-levelmanagers.

Improvesperformanceevaluation.

Advantages

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3

Slide4

Responsibility Centers

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4

Slide5

CostCenter

ProfitCenter

Investment

Center

Evaluation Measures

Profitability

Return on investment (ROI)

Residual income (RI)

Cost

control

Quantity and quality

of services

Managerial Performance

Measurement

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5

Slide6

Since the exercise of control may be clouded,managers are usually held responsible for itemsover which they have predominant ratherthan absolute control.

I’m in

control

Controllability Concept

Managers should

only be evaluated on

revenues or coststhey control.

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Slide7

Preparing Flexible Budgets

The master budget, sometimes called a static budget, is based solely on the planned volume of activity. Flexible budgets differ from static budgets in that they show expected revenues and costs at a variety of volume levels.

Flexible

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Slide8

Determining Variances for Performance Evaluation

The differences between standard and actual amounts are called variances. A variance may be favorable or unfavorable. When actual sales are less than expected, an unfavorable sales variance exists. When actual sales revenue is greater than expected revenue, a company has a favorable sales variance.

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Slide9

Determining Variances for Performance Evaluation

Variances are not limited to the evaluation of revenues. They can also be used to understand the differences between standard and actual amounts of costs. When actual costs are less than standard costs, cost variances are favorable because lower costs increase net income. Unfavorable cost variances exist when actual costs are more than standard costs.

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Slide10

Sales Volume Variances

The difference between the static budget sales amount and the flexible budget sales amount is a measure of the sales volume variance.

Exhibit

15.2Melrose Manufacturing Company’s Volume Variances

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Slide11

Interpreting the Volume Variances

In a standard cost system, marketing managers are usually responsible for the volume variance. Because sales volume drives production, production managers have little control over volume variance.In the case of Melrose, the marketing manager exceeded planned sales volume by 1,000 units, resulting in an $80,000 favorable revenue variance ($80 × 1,000). The unfavorable cost variances are somewhat misleading. Melrose incurred higher costs because it manufactured and sold more units than planned.

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Slide12

Fixed Cost Considerations

The fixed costs are the same in both the static and flexible budgets.

Spending VarianceThe difference between the budgeted fixed costs and the actualfixed costs

Fixed Cost Volume Variance The difference between costs at planned volume versus actual volume

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Slide13

Flexible Budget Variances

For effective performance evaluation, management must compare the actual results achieved to the flexible budget based on the actual volume of activity. Here is a comparison of the standard amount and actual amount per unit for the current period for Melrose.

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Slide14

Calculating Sales Price Variance

or

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Slide15

The Human Element Associated with Flexible Budget Variances

The flexible budget cost variances offer insight into management efficiency.As with sales variances, cost variances require careful analysis.A favorable materials variance could mean that purchasing agents are good negotiators or it might be caused by paying low prices for inferior goods.

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Slide16

The vice president of operations receives summarized information from each unit.

Management by exception

Upper-level management does not receive operating detail unless problems arise.

Management focuses on areas not performing as expected.

Management by Exception

Businesses cannot afford to have managers spend large amounts of time on operations that function normally.

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Slide17

Return on Investment

Return on investment is the ratio of income to the investment used to generate the income.

ROI =

Operating Income

Operating Assets

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Slide18

Return on Investment

LumberManufacturing

Home Building

Furniture Manufacturing

=

=

=

$60,000$300,000

$46,080$256,000

$81,940$482,000

=

20%

=

18%

= 17%

All other things being equal, higher ROIs indicate better performance.

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Slide19

ROI =

Operating Income

Operating Assets

Margin

Turnover

Factors Affecting ROI

ROI =

×

Sales

Operating Assets

Operating Income

Sales

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Slide20

Factors Affecting ROI

Three ways to improve ROI

1

Increase

Sales

2

Reduce

Expenses

3

Reduce Operating Assets(The investment base)

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Slide21

Residual Income

Operating Income– Investment charge = Residual income

Operating Assets

×

Desired ROI = Investment charge

Investment center’s

cost of acquiring

investment capital

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Slide22

Residual Income

Residual income encourages managers to make profitable investments that wouldbe rejected by managers using ROI.

Suboptimization

occurs with ROI when managers

benefit themselves at the expense of the company

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Slide23

End of Chapter Fifteen

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