Kế toán, kiểm toán - Chapter fifteen: Performance evaluation

Chapter FifteenPerformance Evaluation© 2015 McGraw-Hill Education.An accounting system thatprovides information . . . Responsibility AccountingRelating to theresponsibilities ofindividual managers.To evaluatemanagers oncontrollable items. 15-2DecentralizationImproves qualityof decisions.Encourages upper-level management toconcentrate on strategic decisions.Improvesproductivity.Developslower-levelmanagers.Improvesperformanceevaluation. Advantages 15-3Responsibility CentersInvestment CenterProfit CenterCost Center 15-4CostCenterProfitCenterInvestmentCenterEvaluation MeasuresProfitabilityReturn on investment (ROI) Residual income (RI)Cost controlQuantity and qualityof servicesManagerial Performance Measurement 15-5Since the exercise of control may be clouded,managers are usually held responsible for itemsover which they have predominant ratherthan absolute control.I’m in controlControllability ConceptManagers shouldonly be evaluated onrevenues or coststhey control. 15-6Preparing Flexible BudgetsThe 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 15-7Determining Variances for Performance EvaluationThe 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. 15-8Determining Variances for Performance EvaluationVariances 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. 15-9Sales Volume VariancesThe 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 15-10Interpreting the Volume VariancesIn 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. 15-11Fixed Cost ConsiderationsThe fixed costs are the same in both the static and flexible budgets.Spending VarianceThe difference between the budgeted fixed costs and the actualfixed costsFixed Cost Volume Variance The difference between costs at planned volume versus actual volume 15-12Flexible Budget VariancesFor 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. 15-13Calculating Sales Price Varianceor 15-14The Human Element Associated with Flexible Budget VariancesThe 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. 15-15The 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 ExceptionBusinesses cannot afford to have managers spend large amounts of time on operations that function normally. 15-16Return on Investment Return on investment is the ratio of income to the investment used to generate the income.ROI = Operating IncomeOperating Assets 15-17Return on InvestmentLumberManufacturingHome BuildingFurniture 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. 15-18ROI = Operating IncomeOperating AssetsMarginTurnoverFactors Affecting ROIROI = ×SalesOperating AssetsOperating IncomeSales 15-19Factors Affecting ROIThree ways to improve ROI1 Increase Sales 2 Reduce Expenses3 Reduce Operating Assets(The investment base) 15-20Residual Income Operating Income– Investment charge = Residual income Operating Assets× Desired ROI = Investment chargeInvestment center’scost of acquiringinvestment capital 15-21Residual IncomeResidual 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 15-22End of Chapter Fifteen 15-23