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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