Prepared by
Douglas Cloud
Pepperdine University
9-1


Define goal congruence and explain its relationship to control and performance chapter, you should evaluation.

Identify the types of responsibility centers and explain the differences among them.

Determine the positive and negative aspects of specific criteria used for evaluating the performance of responsibility centers.
Continued
9-2


Calculate contribution margin variances and explain their significance.

Describe the pros and cons of including cost allocation in performance reports.

Describe some approaches to allocating costs to responsibility centers.

Explain how cost allocations can create ethical problems.
9-3

A major objective of management control is to encourage goal congruence , which means that as people work to achieve their own goals, they also work to accomplish the company’s goals.
9-4

A responsibility center is an activity, such as a department, that a manager controls.
Types of Responsibility Centers
Cost centers
Revenue centers
Profit centers
Investment centers
9-5

A cost center is a segment whose manager is responsible for costs, but not revenues. A cost center can be relatively small.
Examples:
A manufacturing cell
The office of the chief executive
The legal department
9-6

A revenue center is a segment whose manager is responsible for earning revenues, but not for the costs of generating revenues.
Examples:
Hospitals
Marketing departments
9-7

• A profit center is a segment whose manager is responsible for revenues as well as costs.
• An investment center is a segment whose manager is responsible not only for revenues and costs, but also for the investment required to generate profits.
9-8

A transfer price is the price that one center charges another center within the company.
9-9

Selecting criteria to measure and evaluate performance is important because the criteria influence managers’ actions. The most common deficiencies in performance measures are:
– using a single measure that emphasizes only one objective of the organization; and
– using measures that either misrepresent or fail to reflect the organization’s objectives or the employee’s responsibilities.
9-10

An approach known as the balanced scorecard has become popular recently. This approach extends performance evaluation from merely looking at financial results to formally incorporating measures that look at customer satisfaction, internal business processes, and the learning and growth potential of the organization.
9-11

The balanced scorecard asks four basic questions:
1. How do customers see us? (the customer perspective)
2. What must we excel at? (the internal business process perspective)
3. Can we continue to improve and create value?
(the learning and growth perspective)
4. How do we look to stockholders? (the financial perspective)
9-12

9-13
Responsibility Reports for Cost Centers
Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
Report to Supervisor of Work
Station 106—Drill Press
Materials
Direct labor
Supervision
Power, supplies, miscellaneous
Totals
$ 3,200
14,200
1,100
910
$(80 ) $ 12,760 $ 110
170
(50 )
24
87,300
4,140
3,420
880
(78 )
92
$19,410 $ 64 $107,620 $1,004
Report to Supervisor of
Fabrication Department

9-14
Responsibility Reports for Cost Centers
Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
Report to Supervisor of
Fabrication Department
Station 106—Drill Press
Station 107—Grinding
Station 108—Cutting
Total work stations
$19,410 $ 64 $107,620 $1,004
17,832 122 98,430 (213 )
23,456 876 112,456 1,227
$60,698 $1,062 $318,506 $2,018
Continued

9-15
Responsibility Reports for Cost Centers
Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
Report to Supervisor of
Fabrication Department
Departmental costs (common to work stations):
General supervision
Cleaning
Other
Total
$12,634 $ 0 $ 71,234 $ 0
6,125 324 32,415 762
1,890 (67 ) 10,029 (108 )
$81,347 $1,319 $432,184 $2,672
Report to Manager of
Factory

9-16
Responsibility Reports for Cost Centers
Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
Report to Manager of Factory
Fabrication department
Milling department
Assembly department
Casting department
Total departments
$ 81,347 $1,319 $ 432,184 $2,672
91,234 (2,034 ) 405,190 (4,231 )
107,478 854 441,240 1,346
78,245 (433 ) 367,110 689
$358,304 $ (294 )$1,645,724 $ 476
Continued

9-17
Responsibility Reports for Cost Centers
Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
General factory costs
(common to departments):
Engineering
Heat and light
Building depreciation
General administration
Total factory costs
$ 14,235 $261 $ 81,340 $842
8,435 178 46,221 890
3,400 0
23,110 340
20,400
126,289
0
776
$407,484 $ 485 $1,919,974 $2,984

9-18
Responsibility Reports for Profit Centers (000s)
Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
Report to Product Manager—
Appliances, European Region
Sales
Variable costs:
Production
Selling and administrative
Total variable costs
Contribution margin
Direct fixed costs
Product margin
$122.0
$ 1.5
$387.0
$ 3.2
$ 47.5
$ 2.8
$150.7
$ 5.9
12.2
1.8
38.7
1.9
$ 59.7
$ 4.6
$189.4
$ 7.8
$ 62.3
$ (3.1 ) $197.6
$(4.6 )
36.0
$ (1.2 ) 98.5
(3.1 )
$ 26.3
$ (1.9 ) $ 99.1 $ (1.5 )
To report to manage—European Region

9-19
Responsibility Reports for Profit Centers (000s)
Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
Report to Manager—
European Region
Profit margins:
Appliances
Industrial equipment
Tools
Total product margins
Regional expenses (common to all product lines)
Regional margin
$26.3
$(1.9 ) $ 99.1
$(1.5 )
37.4
3.2
134.5
7.3
18.3
1.1
59.1
(2.0 )
$82.0
$ 2.4
$292.7
$ 3.8
18.5
0.8
61.2
(1.3 )
$63.5
$ 1.6
$231.5
$ 5.1
Report to Executive Vice President

9-20
Responsibility Reports for Profit Centers (000s)
Current Month Year to Date
Over Over
Budget (Under) Budget (Under)
Report to Executive Vice
President
Regional margins:
European
Asian
North American
Total regional margins
Corporate expenses (common to all regions)
Corporate profit
$ 63.5
$ 1.6
$ 231.5 $ 5.1
78.1
(4.3 ) 289.4
(8.2 )
211.8
(3.2 ) 612.4
(9.6 )
$353.4
$ (5.9 ) $1,133.3 $(12.7 )
87.1
1.4
268.5
3.1
$266.3
$ (7.3 ) $ 864.8 $(15.8 )

Profit depends on several factors, including selling prices, sales volumes, and costs.
Budgeted and actual profits rarely coincide because prices, volume, and costs can (and do) vary from expectations. To plan and to evaluate previous decisions, managers need to know the sources of variances.
9-21

Horton Company expected to sell 20,000 units at $20 with unit variable costs of $12. Horton actually sold
21,000 units at $19.
Sales
Budgeted Actual Difference
$400,000 $399,000 $(1,000)
Variable costs 240,000 252,000 (12,000)
Contribution margin $160,000 $147,000 $(13,000)
9-22

The sales volume variance is the difference between
(1) the contribution margin the company would have earned selling the budgeted number of units at the budgeted unit contribution margin and (2) the contribution margin it would have earned selling the actual number of units at the budgeted unit contribution margin.
Sales = budgeted contribution x (actual unit – budgeted unit) volume variance margin per unit sales sales
$8,000 = $8 x (21,000 – 20,000)
9-23

The sales price variance is the difference between (1) actual total contribution margin and (2) total contribution margin that would have been earned at the actual volume and budgeted unit contribution margin.
Sale price variance = units sold x (actual price – budgeted price)
$21,000 F = 21,000 x ($19 - $20)
9-24

Operating departments in manufacturers work directly on products. Operating departments in a retail company serve customers directly.
Service departments (service centers) provide services to operating departments and to one another. Examples: human resources, accounting, and building security.
9-25

1.
Because indirect fixed costs are not controllable by the users, allocating them violates the principle of controllability.
2.
Including allocated costs on performance reports could lead to poor decisions because managers will treat the costs as differential.
9-26

This method is flawed in two respects.
–
It allocates actual costs rather than budgeted costs. Allocating actual costs passes the inefficiencies (or efficiencies) of one department to the next.
–
It allocates fixed costs based on use.
9-27

Raleigh Company has one service department, Maintenance, and two operating departments, Fabrication and Assembly. Data for the departments follow:
Operating Hours of Maintenance Service Used
Department: Budgeted Actual
Fabrication 20,000 20,000
Assembly
Total
Maintenance Department Costs for Year:
Budgeted
Variable (budgeted, $5.00; actual, $5.10) $200,000
Fixed
Totals
20,000
40,000
75,000
$275,000
10,000
30,000
Actual
$153,000
79,500
$232,500
9-28

Actual per-hour cost
$232,500 of providing the service = = $7.75/hr.
9-29
Allocations would be:
Fabrication (20,000 x $7.75)
Assembly (10,000 x $7.75)
$155,000
77,500
Total maintenance costs allocated $232,500


Direct method

Step method

Reciprocal method
9-30

• Illustrated in the chapter material
• Direct method ignores services that service depts. Provide to other service depts.
9-31

• Also called: step-down allocation or step method
• Recognizes that service depts. Provide services for other service depts. As well as operating depts.
• Result: costs of all service depts., except first to be allocated, will reflect their shares of the costs of some other service depts.
9-32

• Also called simultaneous method
• Recognizes the services that each service dept. renders to other service depts.
• 1 st – the percentages that each service dept. receives from the other are decided upon.
• 2 nd – adjusted costs are calculated – to recognize that depts. Provide service to each other.
• Finally – these adjusted costs are allocated to the operating depts. Using the percentages computed.
9-33

Chapter 9
The End
9-34

9-35