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C H A P T E R

9. C H A P T E R. Evaluating Personnel and Divisions. Learning Objective 1. Explain why evaluating personnel and divisions is such an important activity in organizations. Why do Performance Evaluation of Personnel and Divisions?. New technology has made information inexpensive.

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C H A P T E R

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  1. 9 • C H A P T E R Evaluating Personnel and Divisions

  2. Learning Objective 1 • Explain why evaluating personnel and divisions is such an important activity in organizations.

  3. Why do Performance Evaluation of Personnel and Divisions? • New technology has made information inexpensive. • Globalization • Concentration of power in certain market investors.

  4. What Business Developments Have Occurred Because of These Changes? • Increased pace of the business world • Shorter product life cycles and competitive advantages • Requirements for better, quicker, and more decisive actions by management • New companies and industries • New professional services • Outsourcing • Greater uncertainty and recognition of risk • More complex business transactions • Increased focus on customer satisfaction

  5. Parent Subsidiary Subsidiary Plant 1 Plant 2 Dept. 1 Dept. 2 Learning Objective 2 • Identify different kinds of organizational units in which evaluation occurs.

  6. Define These Key Terms • Segments: • Parts of an organization requiring separate reports for evaluation by management. • Decentralized company: • Managers at all levels have authority to make decisions concerning the operations for which they are responsible. • Centralized company: • Top management makes the major decisions for every level rather than delegating decisions to managers at lower levels. • Goal congruence: • Selection of goals for each level that are consistent with those of the company as a whole.

  7. Define Responsibility Accounting and List Three Types • Responsibility accountingis where a manager is held accountable for the costs, revenues, assets, or other elements over which he/she has control.

  8. Manager has control over and is held accountable forcosts. Define Cost Center

  9. Manager has control over and is held accountable for bothcosts and revenues. Define Profit Center

  10. Manager has control over and is held accountable forcosts, revenues, and assets. Define Investment Center

  11. Learning Objective 3 • Explain how performance is evaluated in cost centers.

  12. Standard Costing 1. Develop standard costs. 2. Collect actual costs. 3. Compare actual costs to standard costs and identify variances. 4. Report results including the variances to the managers responsible for variances. 5. Analyze causes of significant controllable variances. 6. Take action to eliminate causes of variances. 7. Journalize actual costs, standard costs, and variances.

  13. Total Variance (1)(2)(3) AQ x AP AQ x SP SQ x SP Price Variance + Quantity Variance Quantity (Usage) Variances Materials quantity variance Labor efficiency variance Manufacturing overhead efficiency variance What is the General Model for Variance Analysis? Price (Rate) Variances Materials price variance Labor rate variance Manufacturing overhead spending variance

  14. I know how much I actually paid, but how much should I have paid? What Does the Direct Materials Price Variance Measure? • Materials Price Variance: • The extent to which the actual price varies from the standard price for the quantity of materials purchased.

  15. 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

  16. 5,000 x $1.75 = 5,000 x $1.65= $8,750 $8,250 Price variance 5,000 x ($1.65 – $1.75) = $500 U Note: This variance is based on the quantity purchased. Complete the Materials Price Variance (1) (2)(3) AQ x AP AQ x SPSQ x SP

  17. (1) (2)(3) AQ x AP AQ x SPSQ x SP Materials Price Variance 4,200 x $1.75 = 4,200 x $1.65 = $7,350 $6,930 Price variance 4,200 x ($1.65 – $1.75) = $420 U Note: This variance is based on the quantity transferred to production.

  18. I know how much the standard cost is for what I actually used, but what should the cost have been had I used the standard materials for what I actually produced? What Does the Direct Materials Quantity Variance Measure? Materials quantity variance: The extent to which the actual quantity of materials used varies from the standard quantity.

  19. (1)(2) (3) AQ x AP AQ x SP SQ x SP 4,200 x $1.65 = 4,000 x $1.65 = $6,930 $6,600 Quantity variance $1.65 x (4,200 – 4,000) = $330 U Materials Quantity Variance Note: The standard quantity allowed is 4,000.

  20. Price variance 4,200 x ($0.10) = $420 U Quantity variance $1.65 x (200) = $330 U Total Materials Variance = $750 U Total Materials Variance (1) (2) (3) AQ x AP AQ x SP SQ x SP 4,200 x $1.75 = 4,200 x $1.65 = 4,000 x $1.65 = $7,350 $6,930 $6,600

  21. xx xx Journal Entries Prepare journal entries for materials variances: Materials price variance: Direct Materials Inventory. . . . . . . . 8,250 Materials Price Variance. . . . . . . . . 500 Cash . . . . . . . . . . . . . . . . . . . . . 8,750 Purchase of materials entered at standard cost. Materials quantity variance: Work-in-Process Inventory. . . . . . . 6,600 Materials Quantity Variance. . . . . . 330 Direct Materials Inventory. . . . . 6,930 Transferred materials to work-in-process.

  22. $ What Do the Direct Labor Variances Measure? • Labor Rate Variance: • The extent to which the actual labor rate varies from the standard rate for the quantity of labor used. • Labor Efficiency Variance: • The extent to which the actual labor used varies from the standard quantity.

  23. $ 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

  24. (1) (2) (3) AH x AR AH x SR SH x SR 4,000 x $5.00 = $20,000 3,900 x $5.20 = 3,900 x $5.00 = $20,280 $19,500 Labor ratevariance 3,900 x ($5.20 – $5.00) = $780 U Labor efficiencyvariance $5.00 x (4,000 – 3,900) = $500 F $ Labor Rate Variance

  25. Labor efficiency variance $5.00 x (4,000 – 3,900) = $500F Labor rate variance3,900 x ($5.20 – $5.00) = $780 U Total Labor Variance = $280 U What is the Total Labor Variance? (1) (2) (3) AH x AR AH x SR SH x SR3,900 x $5.20 3,900 x $5.00 = 4,000 x $5.00 = $20,280 $19,500 $20,000

  26. xx xx Journal Entries Prepare labor rate and efficiency variances: Work-in-Process Inventory. . . . . . . 20,000 Labor Rate Variance . . . . . . . . . . . 780 Labor Efficiency Variance . . . . 500 Wages Payable . . . . . . . . . . . . 21,280 To charge Work-in-Process Inventory for labor costs.

  27. Learning Objective 4 • Explain how performance is evaluated in profit centers.

  28. 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%

  29. Define These Key Terms • Direct costs: • Costs that are specifically traceable to a unit of business or segment being analyzed. Indirect costs: Costs normally incurred for the benefit of several segments or activities. Segment margin: The difference between segment revenue and direct segment costs; a measure of the segment’s contribution to cover indirect fixed costs and provide profits. • Segment-margin ratio: • The segment margin divided by the segment’s net sales revenue; a measure of the efficiency of the segment’s operating performance and, therefore, of its profitability.

  30. Learning Objective 5 Explain how performance is evaluated in investment centers.

  31. Investment Center ROI Investment center income = Investment center assets What is Return on Investment (ROI) and its Formula? ROIis a measure of operating performance and efficiency in utilizing assets; computed in its simplest form by dividing net income by total assets.

  32. Return on Investment (ROI) How can components of ROI be separated? = ROI Profit margin X Asset turnover Net income Net income Revenue = X Total assets Revenue Total assets

  33. Expanded MaterialLearning Objective 6 • Compute and interpret variable overhead variances in cost centers.

  34. Define Each of These Manufacturing Overhead Variances • Total Variable Manufacturing Overhead Variance: The extent to which actual variable manufacturing overhead varies from the amount included in Work-in-Process Inventory. • Variable Manufacturing Overhead Spending Variance: The difference between actual manufacturing overhead incurred and the standard manufacturing overhead for the actual activity level. • Variable Manufacturing Overhead Efficiency Variance: The difference between manufacturing overhead costs at actual hours and manufacturing overhead costs expected at standard hours.

  35. 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

  36. 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

  37. (1) (2) (3) AH x AR AH x SR SH x SR 3,900 x $2.00 = 4,000 x $2.00 = $8,800 $7,800 $8,000 Spending variance $8,800 – $7,800 = $1,000 U Efficiency variance $2.00 x (4,000 – 3,900) = $200 F Total Variable Manufacturing Overhead Variance = $800 U Calculate Variable Manufacturing Overhead Variances

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