CHAPTER
6
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?
What Business Developments
Have Occurred Because of These
Changes?
Learning Objective 2
Describe the responsibility accounting
concept and identity three types of
organizational control units
Parent
Subsidiary
Plant 1
Plant 2
Subsidiary
Dept. 1
Dept. 2
Define These Key Terms
Segments:
Decentralized company:
Centralized company:
Goal congruence:
Define Responsibility Accounting
and List Three Types
Define Cost Center
Define Profit Center
Define Investment Center
Learning Objective 3
Describe standard costing
and the basic variance
analysis model.
Step to Standard Costing
1.
2.
3.
4.
5.
6.
7.
What is the General Model for
Variance Analysis?
Learning Objective 4
Use materials and labor cost
variance analysis to explain
how performance is
controlled in cost centers.
What Does the Direct Materials
Price Variance Measure?
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 . . . . . . . . . . . . . . .
Freight. . . . . . . . . . . . . . . . . . . . . .
Handling costs . . . . . . . . . . . . . . .
Standard material cost per unit .
$1.50
0.10
0.05
$1.65
Complete the Materials Price
Variance
(1)
AQ x AP
(2)
AQ x SP
(3)
SQ x SP
Materials Price Variance
(1)
AQ x AP
(2)
AQ x SP
(3)
SQ x SP
What Does the Direct Materials
Quantity Variance Measure?
Materials Quantity Variance
(1)
AQ x AP
(2)
AQ x SP
(3)
SQ x SP
Total Materials Variance
(1)
AQ x AP
(2)
AQ x SP
(3)
SQ x SP
Journal Entries
Prepare journal entries for materials variances:
Materials price variance:
xx xx
Materials quantity variance:
What Do the Direct Labor
Variances Measure?
Labor Rate Variance:
Labor Efficiency Variance:
$
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. . . . . . . .
Standard hours per unit . . . .
$5.00
2
$
Calculate Labor Rate and
Efficiency Variances
(1)
AH x AR
(2)
AH x SR
(3)
SH x SR
$
What is the Total Labor Variance?
(1)
AH x AR
(2)
AH x SR
(3)
SH x SR
Journal Entries
Prepare labor rate and efficiency variances:
xx xx
Learning Objective 5
Use revenue
variance analysis
to explain how
performance is
controlled in profit
centers
Segment-Margin
Income Statement
Total
Net sales revenue. . . . . . . $50,000
Variable costs:
Cost of goods sold . . . . . . $30,000
S&A costs. . . . . . . . . . . . .
3,000
Total variable costs . . . . $33,000
Contribution margin. . . . . $17,000
Less fixed costs
controllable by
segment managers. . . .
3,500
Segment margin . . . . . . . $ 13,500
Less company
indirect costs. . . . . . . . . $ 4,000
Net income. . . . . . . . . . . . $ 9,500
Segment-margin ratio. . . .
Segment A Segment B
$35,000
$15,000
$25,000
2,000
$27,000
$ 8,000
$ 5,000
1,000
$ 6,000
$ 9,000
1,500
$ 6,500
1,000
$ 8,000
18.6%
53.3%
Define These Key Terms
Direct costs:
Indirect costs:
Segment margin:
Segment-margin ratio:
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. . . . . . . .
Standard Sales Volume . . . .
Expected Market Share . . . . . .
$21.00
1,800
12%
$
What are the sales price and sales
volume variances?
(1)
AQ x AP
(2)
AQ x SP
(3)
SQ x SP
What are the market share and
industry volume variances?
Actual market volume
x Actual market share
x Standard price
Actual mkt. vol.
Exp. mkt vol.
x Expected mkt. shr x Exp mkt shr
x SP
x SP
Learning Objective 6
Use ROI and
residual income
analysis to explain
how performance is
controlled in
investment centers
What is Return on Investment
(ROI) and its Formula?
ROI as used by the DuPont
Management Team
Investment
Center ROI
=
Investment center income
Investment center assets
Divided ROI into management performance
components (profit margin) and asset turnover ratios
Profit Margin X Asset Turnover = ROI
Net Income
Revenue
Revenue
X
Net Income
=
Total Average Assets
Total Average
Assets
Explain Residual Income (RI)
What is the formula for Residual Income?
Expanded Material
Learning Objective 7
Compute and interpret
variable overhead
variances.
Define Each of These
Manufacturing Overhead
Variances
Total Variable Manufacturing Overhead Variance:
Variable Manufacturing Overhead Spending Variance:
Variable Manufacturing Overhead Efficiency Variance:
Variable Overhead Elements
Variable Manufacturing
Overhead Items
Standard Rate
(per DL hour)
Indirect materials. . . . . . . . . . . . .
Indirect labor . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . .
$0.80
0.70
0.50
Total . . . . . . . . . . . . . . . . . . . . .
$2.00
Accounting for
Variable Overhead
Units produced. . . . . . . . . . . . . . . . .
Direct labor hours used . . . . . . . . . .
Standard direct labor hours . . . . . . .
2,000
3,900
4,000
Actual variable overhead costs:
Indirect materials. . . . . . . . . . . . . .
Indirect labor . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . .
$ 3,200
2,600
3,000
Total variable overhead costs. . . . . .
$ 8,800
Calculate Variable Manufacturing
Overhead Variances
(1)
AH x AR
(2)
AH x SR
(3)
SH x SR
Expanded Material
Learning Objective 8
Compute and interpret
fixed overhead
variances.
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
Calculate Fixed Manufacturing
Overhead Variances
(1)
Actual
Amount
(2)
Budget
(3)
SHA x SR
Chapter 6 Managerial Accounting
is Finished