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C H A P T E R

6. C H A P T E R . 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?.

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C H A P T E R

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  1. 6 • C H A P T E R Monitoring Performance in Cost, Profit and Investment Centers

  2. Learning Objective 1 • Explain why control is such an important activity in the management process

  3. Why do Performance Evaluation of Personnel and Divisions?

  4. What Business Developments Have Occurred Because of These Changes?

  5. Parent Subsidiary Subsidiary Plant 1 Plant 2 Dept. 1 Dept. 2 Learning Objective 2 • Describe the responsibility accounting concept and identity three types of organizational control units

  6. Define These Key Terms • Segments: • Decentralized company: • Centralized company: • Goal congruence:

  7. Define Responsibility Accounting and List Three Types

  8. Define Cost Center

  9. Define Profit Center

  10. Define Investment Center

  11. Learning Objective 3 • Describe standard costing and the basic variance analysis model.

  12. Step to Standard Costing Steps

  13. What is the General Model for Variance Analysis?

  14. Learning Objective 4 • Use materials and labor cost variance analysis to explain how performance is controlled in cost centers.

  15. What Does the Direct Materials Price Variance Measure?

  16. Materials Price Variance Assume the following results: Actual results: Direct materials purchased. . . . . . .5,000 @ $1.75 Direct materials used . . . . . . . . . . . 4,200 Units produced . . . . . . . . . . . . . . . . 2,000 Standard costs: Purchase price . . . . . . . . . . . . . . . $1.50 Freight. . . . . . . . . . . . . . . . . . . . . . 0.10 Handling costs . . . . . . . . . . . . . . . 0.05 Standard material cost per unit . $1.65

  17. Complete the Materials Price Variance (1) (2) (3) AQ x AP AQ x SP SQ x SP

  18. Materials Price Variance (1) (2) (3) AQ x AP AQ x SP SQ x SP

  19. What Does the Direct Materials Quantity Variance Measure?

  20. Materials Quantity Variance (1) (2) (3) AQ x AP AQ x SP SQ x SP

  21. Total Materials Variance (1) (2) (3) AQ x AP AQ x SP SQ x SP

  22. xx xx Journal Entries Prepare journal entries for materials variances: Materials price variance: Materials quantity variance:

  23. $ What Do the Direct Labor Variances Measure? • Labor Rate Variance: • Labor Efficiency Variance:

  24. $ Direct Labor Variances Assume the following results: Actual results: Direct labor hours worked. . . . . . 3,900 @ $5.20 Units produced . . . . . . . . . . . . . . . 2,000 Standard costs: Standard labor rate. . . . . . . . $5.00 Standard hours per unit . . . . 2

  25. $ Calculate Labor Rate and Efficiency Variances (1) (2) (3) AH x AR AH x SR SH x SR

  26. What is the Total Labor Variance? (1) (2) (3) AH x AR AH x SR SH x SR

  27. xx xx Journal Entries Prepare labor rate and efficiency variances:

  28. Revenues Costs Learning Objective 5 • Use revenue variance analysis to explain how performance is controlled in profit centers

  29. Segment-MarginIncome Statement Total Segment ASegment B Net sales revenue. . . . . . . $50,000$35,000$15,000 Variable costs: Cost of goods sold . . . . . . $30,000 $25,000 $ 5,000 S&A costs. . . . . . . . . . . . . 3,000 2,000 1,000 Total variable costs . . . . $33,000$27,000$ 6,000 Contribution margin. . . . . $17,000 $ 8,000 $ 9,000 Less fixed costs controllable by segment managers. . . . 3,500 1,500 1,000 Segment margin . . . . . . . $ 13,500 $ 6,500 $ 8,000 Less company indirect costs. . . . . . . . . $ 4,000 Net income. . . . . . . . . . . . $ 9,500 Segment-margin ratio. . . . 18.6% 53.3%

  30. Define These Key Terms • Direct costs: Indirect costs: Segment margin: • Segment-margin ratio:

  31. $ Revenue Variances Assume the following results: Actual results: Actual Sales . . . . . . . . . . . . . . . . . 2,000 @ $20.00 Actual Market Share . . . . . . . . . . 10% Actual Market Volume . . . . . . . . 20,000 Standard costs: Standard Price. . . . . . . . $21.00 Standard Sales Volume . . . . 1,800 Expected Market Share . . . . . . 12%

  32. What are the sales price and sales volume variances? (1) (2) (3) AQ x AP AQ x SP SQ x SP

  33. 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 shr x Standard price x SP x SP

  34. Assets Revenues Costs Learning Objective 6 Use ROI and residual income analysis to explain how performance is controlled in investment centers

  35. What is Return on Investment (ROI) and its Formula?

  36. Investment center income Investment Center ROI = Investment center assets ROI as used by the DuPont Management Team Divided ROI into management performance components (profit margin) and asset turnover ratios Profit Margin X Asset Turnover = ROI Net Income Revenue Revenue Total Average Assets Net Income Total Average Assets = X

  37. Explain Residual Income (RI) • What is the formula for Residual Income?

  38. Expanded MaterialLearning Objective 7 • Compute and interpret variable overhead variances.

  39. Define Each of These Manufacturing Overhead Variances Total Variable Manufacturing Overhead Variance: Variable Manufacturing Overhead Spending Variance: Variable Manufacturing Overhead Efficiency Variance:

  40. Variable Overhead Elements Variable Manufacturing Standard Rate Overhead Items (per DL hour) Indirect materials. . . . . . . . . . . . . $0.80 Indirect labor . . . . . . . . . . . . . . . . 0.70 Other . . . . . . . . . . . . . . . . . . . . . . 0.50 Total . . . . . . . . . . . . . . . . . . . . . $2.00

  41. Accounting forVariable Overhead Units produced. . . . . . . . . . . . . . . . . 2,000 Direct labor hours used . . . . . . . . . . 3,900 Standard 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

  42. Calculate Variable Manufacturing Overhead Variances (1) (2) (3) AH x AR AH x SR SH x SR

  43. Expanded MaterialLearning Objective 8 • Compute and interpret fixed overhead variances.

  44. Fixed Overhead Variances Assume the following results: Actual results: Actual Fixed Overhead. . . . . . $178,920 Actual Production . . . . . . . . . . 45,000 DLH Standard costs: Fixed Overhead Application Rate $4/DLH Expected production of 46,000 DLH

  45. Calculate Fixed Manufacturing Overhead Variances (1) (2) (3) Actual Budget SHA x SR Amount

  46. Chapter 6 Managerial Accountingis Finished I like the dreams of the future better than the history of the past. Thomas Jefferson

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