Managerial Accounting: An Introduction To Concepts, Methods, And Uses

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Managerial Accounting An Introduction To
Concepts, Methods, And Uses

• Chapter 11
• Profit Center
• Performance Evaluation

Maher, Stickney and Weil
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Learning Objectives (Slide 1 of 2)

• Explain the reasons for conducting variance
  analyses.
• Describe how to use the budget for performance
  evaluation.
• Identify the different types of variances between
  actual results and the flexible budget.
• Assign responsibility for variances.

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Learning Objectives (Slide 2 of 2)

• Describe the role of variance analysis in service
  organizations.
• Explain how to use nonfinancial performance
  measures to evaluate and improve processes.
• Explain why an effective performance measurement
  system requires employee involvement.

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Responsibility For Variances

• Variances are calculated for each responsibility
  center, holding all other things constant
• Separates marketing variances from production,
  production variances from purchasing, etc.
• Managers investigate the causes of variances and
  take corrective action, if necessary

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Marketing Variances (Slide 1 of 3)

• Marketing is usually assigned responsibility for
• Sales volume variance
• Sales price variance
• Marketing cost variances

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Marketing Variances (Slide 2 of 3)

• Sales volume variance measures the impact on
  profits when sales volume is different from what
  was expected
• It is essentially a contribution margin variance
  equal to
• Budgeted contribution margin per unit
• Times (Budgeted - Actual Sales volume)
• Sales Volume Variance
• Note that standard variable cost is used to
  compute contribution margin to avoid mixing cost
  variances with the effect of sales volume

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Marketing Variances (Slide 3 of 3)

• Variable marketing cost variances might be the
  result of incorrect amounts paid for sales
  commissions, shipping, etc.
• Accountants would investigate variances resulting
  from bookkeeping adjustments or errors
• Management would investigate marketing activities
  which may have caused variances
• Fixed marketing costs are often discretionary
• A favorable variance does not always indicate
  good performance
• For example, favorable variance might mean the
  company advertised less than planned not
  necessarily good

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Administration Variances

• Admin. variances are often difficult to manage
• No well-defined causal relationship between
  administrative input and output
• Budgeted amounts are discretionary and provide a
  ceiling on costs for a particular task
• Does not provide a norm as in a flexible
  manufacturing budget

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Variance Diagram Victorias Gourmet Coffee
Responsibility Center
Type of Variance
Sales Volume 21,900 F
Sales Price 7,840 F
Variable 1,440 U
Marketing
29,300 F
Mktg. Costs 440 U
Total Variance
Administrative
Fixed 1,000 F
200 F
15,700 F
Variable 12,000 U
Purchasing and Production
13,800 U
Fixed 1,800 U
Exhibit 11.5
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Beyond the Numbers

• Firms have traditionally relied on financial
  measures to evaluate employee performance
• Recently, companies have begun using nonfinancial
  performance measures
• Used to direct employees attention to what they
  can control
• Performance evaluation begins with understanding
  an organizations goals
• Develop measures to evaluate performance in
  achieving those goals

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Performance Evaluation The Process (Slide 1 of
2)

• Continuous improvement - continuously
  reevaluating and improving efficiency of
  activities by
• Improving activities through documentation and
  understanding
• Eliminating activities that do not add value
• Improving efficiency of activities that do add
  value

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Performance Evaluation The Process (Slide 2 of
2)

• Competitive benchmarking - involves the search
  for, and implementation of, the best way to do
  something
• Find an activity that needs improvement
• Find an organization that is most efficient at
  the activity
• Study its process
• Implement that process

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Performance Evaluation The Measures (Slide 1 of
4)

• Value chain analysis - is useful in identifying
  the most useful factors to measure
• Customer satisfaction performance measures -
  reflect organization's performance on
• Quality control
• Delivery performance

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Performance Evaluation The Measures (Slide 2 of
4)

• Functional performance measures- efficiency of
  functional activities affects overall performance
  of organization
• Appropriate functional performance measures
  depend on the type of activity
• Example Forecasting quality
• Percent error in sales forecast
• Usefulness of forecasts to decision makers

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Performance Evaluation The Measures (Slide 3 of
4)

• Time Measures
• Product cycle time - total time to produce a good
  or provide a service
• As cycle time increases, so do costs of
  processing, inspection, moving, and storage
• Product cycle efficiency is calculated as
  follows
• __________Processing Time______________
• (Processing Time Moving Time
• Storing Time Inspection Time)
• The higher the percentage, the less time and
  money spent on non-value-added activities

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Performance Evaluation The Measures (Slide 4 of
4)

• Environmental performance - by measuring
  environmental performance, firms hope to provide
  incentives for employees to help create a clean
  environment
• Example a performance measure to track waste
  minimization is
• Waste Ratio () Waste (in pounds)
• Total Output (in pounds)

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Employee Involvement (Slide 1 of 2)

• Involving workers in performance evaluation and
  improvement has three benefits
• Increases employee commitment to the organization
  and its goals
• The company becomes more responsive to customers
• Provides motivation to workers to further develop
  their skills and knowledge

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Employee Involvement (Slide 2 of 2)

• Effective worker involvement decentralizes
  authority and empowers workers, but presents the
  following challenges
• Creating a system that conveys organizational
  goals and critical success factors to all
  employees
• Developing performance measures that will promote
  goal congruence
• Applying performance measures consistently and
  accurately

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• If you have any comments or suggestions
  concerning this PowerPoint Presentation for
  Managerial Accounting, An Introduction To
  Concepts, Methods, And Uses, please contact
• Dr. Donald R. Trippeer, CPA
• donald.trippeer_at_colostate-pueblo.edu
• Colorado State University-Pueblo