C H A P T E R 9Evaluating

Personnel and Divisions

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 world2. Shorter product life cycles and competitive

advantages3. Requirements for better, quicker, and more

decisive actions by management4. New companies and industries5. New professional services6. Outsourcing7. Greater uncertainty and recognition of risk8. More complex business transactions9. Increased focus on customer satisfaction

Learning Objective 2

Identify different kinds of organizational units in which evaluation occurs.

SubsidiarySubsidiary

ParentParent

SubsidiarySubsidiary

Plant 1Plant 1 Plant 2Plant 2 Dept. 1Dept. 1 Dept. 2Dept. 2

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 These Key Terms

Responsibility accounting is where a manager is held accountable for the costs, revenues, assets, or other elements over which he/she has control.

Define Responsibility Accounting and List Three Types

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?

(1) (2) (3)AQ x AP AQ x SP SQ x SP

Price (Rate) Variances

Materials price variance

Labor rate variance

Manufacturing overhead

spending variance

Quantity (Usage) Variances

Materials quantity variance

Labor efficiency variance

Manufacturing overhead efficiency variance

Price Variance + Quantity VarianceTotal 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?

Assume the following results:Actual results:Direct materials purchased. . . . . . . 5,000 @ $1.75Direct materials used . . . . . . . . . . . 4,200Units produced . . . . . . . . . . . . . . . . 2,000

Standard costs:Purchase price . . . . . . . . . . . . . . . . $1.50Freight. . . . . . . . . . . . . . . . . . . . . . . 0.10Handling costs . . . . . . . . . . . . . . . . 0.05Standard material cost per unit . . . $1.65

Materials Price Variance

Complete the Materials Price Variance

(1) (2) (3) AQ x AP AQ x SP SQ x SP

Price variance5,000 x ($1.65 – $1.75)

= $500 U

Note: This variance is based on the quantity purchased.

5,000 x $1.75 = 5,000 x $1.65 =

$8,750 $8,250

Materials Price Variance

(1) (2) (3) AQ x AP AQ x SP SQ x SP

Price variance4,200 x ($1.65 – $1.75)

= $420 U

Note: This variance is based on the quantity transferred to production.

4,200 x $1.75 = 4,200 x $1.65 =

$7,350 $6,930

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 costhave been had I used the standard

materials for what I actuallyproduced?

Materials Quantity Variance

(1) (2) (3) AQ x AP AQ x SP SQ x SP

Note: The standard quantity allowed is 4,000.

Quantity variance$1.65 x (4,200 – 4,000)

= $330 U

4,200 x $1.65 = 4,000 x $1.65 =

$6,930 $6,600

Total Materials Variance

(1) (2) (3) AQ x AP AQ x SP SQ x SP4,200 x $1.75 = 4,200 x $1.65 = 4,000 x $1.65 = $7,350 $6,930 $6,600

Quantity variance$1.65 x (200)

= $330 U

Price variance4,200 x ($0.10)

= $420 U

Total Materials Variance = $750 U

Prepare journal entries for materials variances:

Materials price variance:Direct Materials Inventory. . . . . . . . 8,250Materials Price Variance. . . . . . . . . 500 Cash . . . . . . . . . . . . . . . . . . . . . 8,750

Purchase of materials entered at standard cost.

Materials quantity variance:Work-in-Process Inventory. . . . . . . 6,600Materials Quantity Variance. . . . . . 330 Direct Materials Inventory. . . . . 6,930

Transferred materials to work-in-process.

Journal Entries

xxxx

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.

What Do the Direct Labor Variances Measure?

$$

Assume the following results:

Actual results:Direct labor hours worked. . . . . . 3,900 @ $5.20Units produced . . . . . . . . . . . . . . . 2,000

Standard costs:Standard labor rate. . . . . . . . $5.00Standard hours per unit . . . . 2

$$

Direct Labor Variances

Labor Rate Variance

(1) (2) (3) AH x AR AH x SR SH x SR

$$

Labor rate variance3,900 x ($5.20 – $5.00)

= $780 U

3,900 x $5.20 = 3,900 x $5.00 =

$20,280 $19,500

Labor efficiency variance

$5.00 x (4,000 – 3,900)= $500 F

4,000 x $5.00 =

$20,000

What is the Total Labor Variance?

(1) (2) (3) AH x AR AH x SR SH x SR 3,900 x $5.20 3,900 x $5.00 = 4,000 x $5.00 =

$20,280 $19,500 $20,000

Labor efficiency variance

$5.00 x (4,000 – 3,900)= $500 F

Labor rate variance 3,900 x ($5.20 – $5.00)

= $780 U

Total Labor Variance = $280 U

Prepare labor rate and efficiency variances:

Journal Entries

xxxx

Work-in-Process Inventory. . . . . . . 20,000Labor Rate Variance . . . . . . . . . . . 780Labor Efficiency Variance . . . . 500 Wages Payable . . . . . . . . . . . . 21,280

To charge Work-in-Process Inventory for labor costs.

Learning Objective 4

Explain how performance is evaluated in profit centers.

Total Segment A Segment BNet sales revenue. . . . . . . $50,000 $35,000 $15,000Variable costs: Cost of goods sold . . . . . . $30,000 $25,000 $ 5,000S&A costs. . . . . . . . . . . . . 3,000 2,000 1,000 Total variable costs . . . . $33,000 $27,000 $ 6,000Contribution margin. . . . . $17,000 $ 8,000 $ 9,000Less fixed costs controllable by segment managers. . . . 3,500 1,500 1,000Segment margin . . . . . . . $ 13,500 $ 6,500 $ 8,000Less company indirect costs. . . . . . . . . $ 4,000Net income. . . . . . . . . . . . $ 9,500Segment-margin ratio. . . . 18.6% 53.3%

Segment-MarginIncome Statement

Define These Key Terms

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.

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.

Indirect costs: Costs normally incurred for the benefit of several segments or activities.

Direct costs: Costs that are specifically traceable to a unit of business or segment being analyzed.

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?

= X

= X ROI

Net income

Total assets

Net income

Revenue

Profit margin

Revenue

Total assets

Asset turnover

Expanded MaterialLearning Objective 6

Compute and interpret variable overhead variances in cost centers.

Total Variable Manufacturing Overhead Variance:

The extent to which actual variable manufacturing overhead varies from the amount included in Work-in-Process Inventory.

Define Each of These Manufacturing Overhead Variances

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 Standard Rate Overhead Items (per DL hour)

Indirect materials. . . . . . . . . . . . . $0.80Indirect labor . . . . . . . . . . . . . . . . 0.70Other . . . . . . . . . . . . . . . . . . . . . . 0.50

Total . . . . . . . . . . . . . . . . . . . . . $2.00

Accounting forVariable Overhead

Units produced. . . . . . . . . . . . . . . . . 2,000Direct labor hours used . . . . . . . . . . 3,900Standard direct labor hours . . . . . . . 4,000

Actual variable overhead costs: Indirect materials. . . . . . . . . . . . . . $ 3,200 Indirect labor . . . . . . . . . . . . . . . . . 2,600 Other . . . . . . . . . . . . . . . . . . . . . . . 3,000

Total variable overhead costs. . . . . . $ 8,800

(1) (2) (3) AH x AR AH x SR SH x SR

Calculate Variable Manufacturing Overhead Variances

Spending variance$8,800 – $7,800

= $1,000 U

3,900 x $2.00 = 4,000 x $2.00 = $8,800 $7,800 $8,000

Efficiency variance$2.00 x (4,000 – 3,900)

= $200 F

Total Variable Manufacturing Overhead Variance = $800 U