CHAPTER
9
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?
1. New technology has made
information inexpensive.
2. Globalization
3. Concentration of power in
certain market investors.
What Business Developments Have
Occurred Because of These Changes?
1. Increased pace of the business world
2. Shorter product life cycles and competitive
advantages
3. Requirements for better, quicker, and more
decisive actions by management
4. New companies and industries
5. New professional services
6. Outsourcing
7. Greater uncertainty and recognition of risk
8. More complex business transactions
9. Increased focus on customer satisfaction
Learning Objective 2
Identify different kinds of organizational
units in which evaluation occurs.
Parent
Subsidiary
Plant 1
Plant 2
Subsidiary
Dept. 1
Dept. 2
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.
Define Responsibility Accounting and
List Three Types
Responsibility accounting is where a manager is
held accountable for the costs, revenues,
assets, or other elements over which he/she
has control.
Define Cost Center
Manager has control over and
is held accountable for costs.
Define Profit Center
Manager has control over and
is held accountable for both
costs and revenues.
Define Investment Center
Manager has control over and is held
accountable for costs, revenues, and
assets.
Learning Objective 3
Explain how performance is
evaluated in cost centers.
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.
What is the General Model for Variance
Analysis?
Total Variance
Price Variance + Quantity Variance
(1)
AQ x AP
Price (Rate) Variances
Materials price variance
Labor rate variance
Manufacturing overhead
spending variance
(2)
AQ x SP
(3)
SQ x SP
Quantity (Usage) Variances
Materials quantity variance
Labor efficiency variance
Manufacturing overhead
efficiency variance
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.
I know how much I actually
paid, but how much
should I have paid?
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
5,000 x $1.75 =
$8,750
5,000 x $1.65 =
$8,250
Price variance
5,000 x ($1.65 – $1.75)
= $500 U
Note: This variance is based on the
quantity purchased.
(3)
SQ x SP
Materials Price Variance
(1)
AQ x AP
(2)
AQ x SP
4,200 x $1.75 =
$7,350
4,200 x $1.65 =
$6,930
Price variance
4,200 x ($1.65 – $1.75)
= $420 U
Note: This variance is based on the
quantity transferred to production.
(3)
SQ x SP
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.
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?
Materials Quantity Variance
(1)
AQ x AP
(2)
AQ x SP
4,200 x $1.65 =
$6,930
(3)
SQ x SP
4,000 x $1.65 =
$6,600
Quantity variance
$1.65 x (4,200 –
4,000)
= $330 Uquantity
Note: The standard
allowed is 4,000.
Total Materials Variance
(1)
AQ x AP
(2)
AQ x SP
(3)
SQ x SP
4,200 x $1.75 =
$7,350
4,200 x $1.65 =
$6,930
4,000 x $1.65 =
$6,600
Price variance
Quantity variance
4,200 x ($0.10)
= $420 U
$1.65 x (200)
= $330 U
Total Materials Variance = $750 U
Journal Entries
Prepare journal entries for materials variances:
Materials price variance:
xx xx
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.
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.
$
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
$
Labor Rate Variance
(1)
AH x AR
3,900 x $5.20 =
$20,280
(2)
AH x SR
3,900 x $5.00 =
$19,500
$
(3)
SH x SR
4,000 x $5.00 =
$20,000
Labor rate variance Labor efficiency variance
3,900 x ($5.20 – $5.00)
= $780 U
$5.00 x (4,000 – 3,900)
= $500 F
What is the Total Labor Variance?
(1)
AH x AR
3,900 x $5.20
$20,280
(2)
AH x SR
(3)
SH x SR
3,900 x $5.00 = 4,000 x $5.00 =
$19,500
$20,000
Labor rate variance
3,900 x ($5.20 – $5.00)
= $780 U
Labor efficiency
variance
$5.00 x (4,000 – 3,900)
= $500 F
Total Labor Variance = $280 U
Journal Entries
Prepare labor rate and efficiency variances:
Work-in-Process Inventory. . . . . . .
Labor Rate Variance . . . . . . . . . . .
Labor Efficiency Variance . . . .
Wages Payable . . . . . . . . . . . .
20,000
780
500
21,280
To charge Work-in-Process Inventory for labor costs.
xx xx
Learning Objective 4
Explain how
performance is
evaluated 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:
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.
Learning Objective 5
Explain how
performance
is evaluated in
investment
centers.
What is Return on Investment (ROI) and
its Formula?
ROI is a measure of operating performance and
efficiency in utilizing assets; computed in its simplest
form by dividing net income by total assets.
Investment
Center
ROI
=
Investment center income
Investment center assets
Return on Investment (ROI)
How can components of ROI be separated?
ROI
Net income
Total assets
=
=
Profit margin X Asset turnover
Net income
Revenue
X
Revenue
Total assets
Expanded Material
Learning Objective 6
Compute and interpret
variable overhead
variances in cost centers.
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-inProcess 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.
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
$8,800
(2)
AH x SR
(3)
SH x SR
3,900 x $2.00 = 4,000 x $2.00 =
$7,800
$8,000
Spending variance
Efficiency variance
$8,800 – $7,800
= $1,000 U
$2.00 x (4,000 – 3,900)
= $200 F
Total Variable Manufacturing Overhead
Variance = $800 U