c h a p t e r 6 monitoring performance in cost, profit and investment centers
TRANSCRIPT
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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
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Learning Objective 1
Explain why control is such an important activity in the management process
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Why do Performance Evaluation of Personnel and Divisions?
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What Business Developments Have Occurred Because of These
Changes?
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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
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Segments:
Decentralized company:
Centralized company:
Goal congruence:
Define These Key Terms
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Define Responsibility Accounting and List Three Types
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Define Cost Center
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Define Profit Center
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Define Investment Center
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Learning Objective 3
Describe standard costing and the basic variance analysis model.
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Step to Standard Costing
1.
2.
3.
4.
5.
6.
7.
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What is the General Model for Variance Analysis?
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Learning Objective 4
Use materials and labor cost variance analysis to explain how performance is controlled in cost centers.
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What Does the Direct Materials Price Variance Measure?
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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
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Complete the Materials Price Variance
(1) (2) (3) AQ x AP AQ x SP SQ x SP
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Materials Price Variance
(1) (2) (3) AQ x AP AQ x SP SQ x SP
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What Does the Direct Materials Quantity Variance Measure?
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Materials Quantity Variance
(1) (2) (3) AQ x AP AQ x SP SQ x SP
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Total Materials Variance
(1) (2) (3) AQ x AP AQ x SP SQ x SP
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Prepare journal entries for materials variances:
Materials price variance:
Materials quantity variance:
Journal Entries
xxxx
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Labor Rate Variance:
Labor Efficiency Variance:
What Do the Direct Labor Variances Measure?
$$
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Assume the following results:
Actual results:Direct labor hours worked. . . . . . 3,900 @ $5.20Units produced . . . . . . . . . . . . . . . 2,000
Standard costs:Standard labor rate. . . . . . . . $5.00Standard hours per unit . . . . 2
$$
Direct Labor Variances
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Calculate Labor Rate and Efficiency Variances $$
(1) (2) (3) AH x AR AH x SR SH x SR
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What is the Total Labor Variance?
(1) (2) (3) AH x AR AH x SR SH x SR
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Prepare labor rate and efficiency variances:
Journal Entries
xxxx
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Learning Objective 5
Use revenue variance analysis to explain how performance is controlled in profit centers
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Total Segment A Segment BNet sales revenue. . . . . . . $50,000 $35,000 $15,000Variable costs: Cost of goods sold . . . . . . $30,000 $25,000 $ 5,000S&A costs. . . . . . . . . . . . . 3,000 2,000 1,000 Total variable costs . . . . $33,000 $27,000 $ 6,000Contribution margin. . . . . $17,000 $ 8,000 $ 9,000Less fixed costs controllable by segment managers. . . . 3,500 1,500 1,000Segment margin . . . . . . . $ 13,500 $ 6,500 $ 8,000Less company indirect costs. . . . . . . . . $ 4,000Net income. . . . . . . . . . . . $ 9,500Segment-margin ratio. . . . 18.6% 53.3%
Segment-MarginIncome Statement
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Define These Key Terms
Segment-margin ratio:
Segment margin:
Indirect costs:
Direct costs:
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Assume the following results:
Actual results:Actual Sales . . . . . . . . . . . . . . . . . 2,000 @ $20.00Actual Market Share . . . . . . . . . . 10%Actual Market Volume . . . . . . . . 20,000
Standard costs:Standard Price. . . . . . . . $21.00Standard Sales Volume . . . . 1,800Expected Market Share . . . . . . 12% $$
Revenue Variances
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What are the sales price and sales volume variances?
(1) (2) (3) AQ x AP AQ x SP SQ x SP
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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
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Learning Objective 6
Use ROI and residual income analysis to explain how performance is controlled in investment centers
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What is Return on Investment (ROI) and its Formula?
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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
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Explain Residual Income (RI)
What is the formula for Residual Income?
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Expanded MaterialLearning Objective 7
Compute and interpret variable overhead variances.
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Total Variable Manufacturing Overhead Variance:
Define Each of These Manufacturing Overhead
Variances
Variable Manufacturing Overhead Spending Variance:
Variable Manufacturing Overhead Efficiency Variance:
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Variable Overhead Elements
Variable Manufacturing Standard Rate Overhead Items (per DL hour)
Indirect materials. . . . . . . . . . . . . $0.80Indirect labor . . . . . . . . . . . . . . . . 0.70Other . . . . . . . . . . . . . . . . . . . . . . 0.50
Total . . . . . . . . . . . . . . . . . . . . . $2.00
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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
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(1) (2) (3) AH x AR AH x SR SH x SR
Calculate Variable Manufacturing Overhead Variances
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Expanded MaterialLearning Objective 8
Compute and interpret fixed overhead variances.
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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
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(1) (2) (3) Actual Budget SHA x SR Amount
Calculate Fixed Manufacturing Overhead Variances
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Chapter 6 Managerial Accountingis Finished