12-1
Chapter 12
Performance
Assessment
Prepared by
Douglas Cloud
Pepperdine
University
12-2
Objectives
1. Explain responsibility
accounting
After studying
this and
differentiate chapter,
betweenyou
financial
and
should
nonfinancial performance
be able to:measures.
2. Differentiate between static and flexible
budgets used in performance reporting.
3. Determine and interpret direct materials and
direct labor cost variances.
4. Prepare a performance report for a revenue
center.
12-3
…or on various aspects
Responsibilityof the
Accounting
value chain that
are accountable for the
accomplishment of
Responsibility
specific activities or
accounting may
objectives.
focus on specific
units within the
organization...
12-4
Responsibility Accounting
Responsibility accounting on a
poorly designed system can
lead to unethical practices by
managers in key positions if
too much pressure is placed on
meeting performance targets.
Performance
12-5
Organizational Structure
Organizational structure is the
arrangement of lines of responsibility
within the organization.
12-6
GE’s Six Sigma Program
The program has five basic steps:
1. Define problem—Generally teams work to define
problems related to some process or customer
satisfaction.
2. Measure—Determine what is wrong with the existing
process or service.
3. Analyze—Determine reasons for what is wrong.
4. Improve—Define and develop a plan of action.
5. Control—To ensure that changes are installed and used
effectively, measures are implemented to keep problem
from recurring.
12-7
Financial Measures
Actual Cost Allowed Cost Variance
Vice President Operations
Mall 1
Mall 2
Vice president’s office
Total
From Manager: Mall 2
$ 55,000
69,600
10,900
$135,500
$ 54,800
68,400
12,000
$135,200
$ 200
1,200
1,100
$ 300
U
U
F
U
12-8
Financial Measures
Actual Cost Allowed Cost Variance
Manager: Mall 2
Maintenance Department $ 25,400
Advertising Department
17,500
Security Department
20,500
Mall manager’s office
6,200
Total
$ 69,600
From Head: Security
Department
To Vice President Operations
$ 24,700
18,000
19,900
5,800
$ 68,400
$ 700 U
500 F
600 U
100 U
$1,200 U
12-9
Financial Measures
Actual Cost Allowed Cost Variance
Head: Security Department
Supplies
$ 3,000
$ 2,000 $ 1,000U
Staff wages
9,500
10,000
500 F
General overhead
8,000
7,900
100 F
Total
$135,500
$135,200 $ 600 U
To Manager: Mall 2
12-10
Nonfinancial Measures as Percentages
80
70
60
50
40
30
20
10
0
Importance
Use
x
x
x
Use
Measure
Importance
12-11
Nonfinancial Measures
Common measures are:
 unit sales volume
 unit production output
 quantity of material
used
 labor and/or machine
hours
Other measures
include
assessments of:
productivity
quality
innovation
12-12
Nonfinancial Measures
Actual
Activity
Head: Security Department
Absenteeism rate
Security complaints per
store per week
To Manager: Mall 2
12 %
4
Expected
Activity Variance
6%
6% U
6
2
F
12-13
Nonfinancial Measures
Actual
Activity
Manager: Mall 2
Percentage occupancy
Absenteeism rate
Complaints per week:
General
Maintenance
Security
Total complaints
To ViceSecurity
President Operations
From Head:
Department
Expected
Activity Variance
87 %
10 %
94 %
5%
7% U
5% U
4
7
4
15
4
6
16
16
0
1
2
1
F
U
F
F
12-14
Nonfinancial Measures
Actual
Activity
Vice President Operations
Percent occupancy
Absenteeism rate
Complaints per week
From Manager: Mall 2
92 %
8%
45
Expected
Activity Variance
98 %
4%
50
6% U
4% U
5
F
12-15
Performance reports
show expanded
Performance
Reports
authority and
responsibility for
operating costs
12-16
Types of Responsibility Centers
 Cost Center
 Revenue Center
 Profit Center
 Investment Center
12-17
Types of Responsibility Centers
A cost center is a responsibility
center whose manager is
responsible only for managing
costs; there is no revenue
responsibility.
12-18
Types of Responsibility Centers
Cost Center
Manufacturing Plant
Tooling department
Assembly activities
12-19
Types of Responsibility Centers
Cost Center
Retail store
Inventory control
function
Maintenance department
12-20
Types of Responsibility Centers
Cost Center
TV station
Audio/video engineering
Building and grounds
12-21
Types of Responsibility Centers
Cost Center
College
History department
Student registering
activities
12-22
Types of Responsibility Centers
Cost Center
City government
Public safety (police and
fire)
Road maintenance
12-23
Types of Responsibility Centers
A revenue center is a
responsibility
A profitcenter
center is a
whose
manager is center
responsibility
An investment center is a
responsible
for
the
whoseresponsibility
manager
is center whose
generation
of sales for
responsible
manager is responsible for
revenues.
revenues,
costs,
and
the relationship between its
resulting
profits.
profits
and the total assets
invested in the center.
12-24
Manufacturing Budget
McMillan Company
Manufacturing Budget
For the Month of July
Manufacturing costs:
Unit level:
Direct materials (10,000 x 2 pounds X $5)
Assembly (10,000 x 0.25 hours x $24)
Waterproofing and Inspection (10,000 x $8)
Batch level:
Setup (10 batches x $400)
Test run (10 batches x $100)
Product level
Facility level
Total$297,000
$100,000
60,000
80,000
4,000
1,000
20,000
32,000
12-25
Static Budget
McMillan Company
Production Department Performance Report
For the Month of July
Actual
Original
Budget
Static Budget
Variance
Volume
11,000
10,000
Unit level:
Direct materials
$108,000 $100,000 $ 8,000 U
Assembly
70,000
60,000 10,000 U
Waterproofing and Inspection
81,000
80,000
1,000 U
Batch costs:
Setup
4,000
Test runs
1,000
Continued
12-26
Static Budget
McMillan Company
Production Department Performance Report
For the Month of July
Volume
Batch costs:
Total
Fixed overhead:
Product
Facility
Totals
Actual
Original
Budget
11,000
10,000
5,600
5,000
Static Budget
Variance
600 U
22,000
20,000
2,000 U
31,000
32,000
1,000 F
$317,600 $297,000 $20,600 U
12-27
Flexible Budget
McMillan Company
Production Department Performance Report
For the Month of July
Actual
Original
Budget
Volume
11,000
10,000
Unit level:
Direct materials
$108,000 $110,000
Assembly
70,000
66,000
Waterproofing and Inspection
81,000
88,000
Batch costs:
Setup
4,400
Test runs
1,100
Continued
Static Budget
Variance
$ 2,000 F
4,000 U
7,000 F
12-28
Flexible Budget
McMillan Company
Production Department Performance Report
For the Month of July
Volume
Batch costs:
Total
Fixed overhead:
Product
Facility
Totals
Actual
Original
Budget
11,000
10,000
5,600
Static Budget
Variance
5,500
100 U
22,000
20,000
31,000
32,000
$317,600 $321,500
2,000 U
1,000 F
$3,900 F
12-29
Standard Costs
A standard cost
indicates what it should
Traditionally,
cost to provide an
activity or produce onestandard costs are
developed from an
batch or unit of product
engineering
under planned and
analysis
or
from
an
efficient
operating
Flexible budgets
analysis of adjusted
conditions.
are based on
historical
data.
standard costs.
12-30
Relational and Discretionary
Cost Centers
It is a center that has
clearly defined
relationships
between effort and
accomplishment.
What is a
relational cost
center?
12-31
Standard and Discretionary
Cost
A discretionary
cost Centers
center is just the
opposite. It doesn’t
have clearly defined
relationships between
effort and
accomplishment.
12-32
Direct Material Standards
and Variances
 Standard price indicates how much should be
paid for each input unit of direct materials.
 Materials price variance is the difference
between actual and standard cost of materials
inputs.
 Standard quantity indicates the amount of direct
materials allowed to produce one unit of output.
 Materials quantity variance is the difference
between standard cost of actual materials inputs
and flexible budget cost for materials.
12-33
Standard Material Variances
Standard Cost of
Actual Inputs
Actual Cost
Actual quantity (AQ) 24,000
Actual price (AP)
x $4.50
$108,000
Actual quantity (AQ) 24,000
Standard price (SP) x $5
$120,000
Material price variance,
$12,000 F
12-34
Standard Material Variances
Standard Cost
of Actual Inputs
Flexible
Budget Cost
Actual quantity (AQ) 24,000
Standard price (SP) x
$5
$120,000
Standard quantity (AQ) 22,000
Standard price (SP) x
$5
$110,000
11,000 units x 2
pounds per unit
Material quantity variance,
$10,000 U
12-35
Standard Material Variances
Actual Costs
(AQ)
(AP)
24,000
x $4.50
$108,000
Standard Cost
of Actual Inputs
(AQ) 24,000
(SP)
x $5
$120,000
Flexible Budget Cost
(SQ) 22,000
(SP)
x $5
$110,000
Materials price
Materials quantity
variance $12,000 F variance $10,000 U
Total flexible budget materials
variance $2,000 F
12-36
Interpreting Material Variances
Favorable materials price variance indicates
that management paid less per unit than the
price allowed by the standard
• Receiving discounts for purchasing
Possible
Explanations: larger than normal quantities
• Effective bargaining by the employee
• Purchasing substandard quality
materials
• Purchasing from a distress seller
12-37
Interpreting Material Variances
Unfavorable materials price variance means that the
purchasing employee paid more per unit for
material than the price allowed by the standard.
• Failure to buy in sufficient quantities
Possible
Explanations: to get normal discounts
• Purchase of higher quality material
than called for in the product specs
• Failure to place material orders on a
timely basis
• Failure to bargain for better prices
12-38
Interpreting Material Variances
Favorable materials quantity variance means that the
actual quantity of raw materials used was less than
the quantity allowed for the units produced.
• Less materials waste than allowed by
Possible
Explanations: the standards
• Better than expected machine
efficiency
• Direct materials of higher quality than
required by the standards
• More efficient use of direct materials
12-39
Interpreting Material Variances
Unfavorable materials quantity variance occurs
when the quantity of raw materials used exceeds
the quantity allowed for the units produced.
• Incurring more waste than provided
Possible
Explanations: for in the standards
• Poorly maintained machinery
requiring larger amounts of raw
materials
• Raw materials of lower quality than
required by the standards
• Poor trained employees
12-40
Standard Labor Variances
Standard Cost of
Actual Inputs
Actual Cost
Actual hours (AH)
Actual rate (AR)
2,800
x $25
$70,000
Actual hours (AH)
Standard rate (SR)
2,800
x $24
$67,200
Labor rate variance, $2,800 U
12-41
Standard Labor Variances
Standard Cost of
Actual Inputs
Actual hours (AH)
Standard rate (SR)
Flexible Budget
Cost
2,800
x $24
$67,200
Standard hours (SH)
2,750
Standard rate (SR)
x $24
$66,000
11,000 units x 1/4
hour per unit
Labor efficiency variance,
$1,200 U
Standard Labor Variances
Actual Costs
(AH)
(AR)
2,8000
x $25
$70,000
Standard Cost
of Actual Inputs
(AH) 2,8000
(SR) x $24
$67,200
Labor rate
variance $2,800 U
Flexible Budget Cost
(SH) 2,750
(SR) x $24
$66,000
Labor efficiency
variance $1,200 U
Total flexible budget labor
variance, $4,000 U
12-43
Interpreting Labor Variances
 Unfavorable assembly rate variance may be caused
by the use of higher paid laborers than provided for
by the standards.
 Favorable assembly rate variance occurs if lower
paid workers are used.
 Unfavorable labor efficiency variances occur
whenever workers require more than the number of
hours allowed by the standards.
 Favorable labor efficiency variance occurs when
fewer labor hours are used than are allowed by the
standards
12-44
Performance Reports for
Revenue Centers
Performance reports for revenue
centers include a comparison of
actual and budgeted revenues.
Assume that McMillan Company’s July sales budget
called for the sale of 10,000 units at $40 each. If
McMillan Company actually sold 11,000 units at $39
each, what would be the total revenue variance?
12-45
Revenue Variance
Actual revenues (11,000 x $39)
Budgeted revenues (10,000 x $40)
Revenue varianceActual volume x
Actual price
Budget volume x
Budgeted price
$429,000
- 400,000
$ 29,000 F
12-46
Sales Price Variance
Sales price variance = (Actual selling price –
Budgeting selling price) x
Actual sales volume
Sales price variance = ($39 – $40) x 11,000 units
Sales price variance = $11,000 U
12-47
Sales Volume Variance
Sales volume variance = (Actual sales volume –
Budgeting sales
volume) x Budgeted
selling price
Sales volume variance = (11,000 units –10,000
units) x $40
Sales volume variance = $40,000 F
12-48
The net of the sales
price and sales volume
Sales price variance
$11,000 U
variances is equal toSales
the volume variance 40,000 F
Revenue variance
$29,000 F
revenue variance.
Actual revenue
Budgeted revenues
Revenue variance
$429,000
400,000
$ 29,000 F
12-49
Inclusion of Controllable Costs
 Controllable costs
should also be considered
when evaluating the overall performance of
revenue centers.
 Order getting costs are costs incurred to obtain
customers’ orders.
 Order filling costs are costs incurred to place
finished goods in the hands of purchasers.
12-50
Net Sales Volume Variance
Sales
Direct materials
Assembly
Variable manufacturing
overhead:
Unit level
Batch level
Selling
Contribution margin
$40.00
$10.00
6.00
$8.00
0.50
8.50
5.00
29.50
$10.50
12-51
Net Sales Volume Variance
Net sales volume variance = (11,000 – 10,000)
x $10.50
Net sales volume variance = $10,500 F
12-52
Appendices
Click button to skip Appendices
12-53
Variable Overhead Variances
Actual
Costs
$81,000
Standard Cost of
Actual Inputs
Actual pound (AP)
Standard rate (SR)
Total
Variable overhead
spending variance,
$15,000 F
24,000
x $4
$96,000
12-54
Variable Overhead Variances
Flexible Budget
Cost
Actual pound (AP) 24,000 Pounds allowed (SP) 22,000
Standard rate (SRP) x $4 Standard rate (SRP) x $4
$88,000
Total
$96,000 Total
Standard Cost of
Actual Inputs
Variable overhead
effectiveness
variance, $8,000 U
12-55
Variable Overhead Variances
Actual
Costs
$81,000
Standard Cost of
Actual Inputs
AP
20,000
SRP
x $4
Total
$80,000
Flexible Budget
Cost
SP
22,000
SRP
x $4
Total
$88,000
Total flexible budget variable
overhead variance, $7,000 F
12-56
Fixed Overhead Variances
Actual
Costs
$31,000
Budgeted Cost
Budgeted hours (BH)
Standard price (SP)
Total
Fixed overhead budget
variance, $1,000 F
4,000
x
$8
$32,000
12-57
Fixed Overhead Variances
Budgeted Cost
Assigned
Budgeted Cost
4,400
Budgeted hours (BH) 4,000 SH allowed (SH)
Standard price (SP) x
$8 Standard rate (SP) x $8
$35,200
Total
$32,000 Total
11,000 units x 0.40
Fixed overhead
volume variance,
$3,200 F
12-58
Fixed Overhead Variances
Actual
Costs
$31,000
Budgeted Cost
$32,000
Budgeted Cost
Assigned
SH
4,400
SP
x $8
Total $35,200
Total fixed manufacturing
overhead variance, $4,200 F
12-59
Chapter 12
The
End
12-60