performance measurement and responsibility accounting chapter 22 powerpoint editor: anna boulware...
TRANSCRIPT
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Performance Measurement and Responsibility AccountingChapter 22
PowerPoint Editor:Anna Boulware
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Wild, Shaw, and ChiappettaFinancial & Managerial Accounting6th Edition
Wild, Shaw, and ChiappettaFinancial & Managerial Accounting6th Edition
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By Geography
By Geography
By Product line
By Product line
Common ways to decentralize organizations
Decentralization
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Providing lower-level managers with decision-making authority offers several advantages.
Advantages of Decentralization
Timely access to
information
Enables top-level
managers to focus on long-term strategy
3
Good training
for employees
Boostsemployee
morale and retention
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Decentralization has potential disadvantages which organizations should consider:
Disadvantages of Decentralization
Departmentmanagers
are too focusedon own
department
Decisions of individual departmentsmight conflict
with one another
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Departments might
duplicate certain
activities
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Performance Evaluation The accounting system provides information about
resources used and outputs achieved. Managers use this information to control operations, appraise performance,
allocate resources, and plan strategy. The type of accounting information provided depends on whether the
department is a . . .
Evaluated on ability to
control costs.
Costcenter
Evaluated on abilityto generate revenues
in excess of expenses.
Profitcenter
Evaluated on abilityto generate return on investment in assets.
Investmentcenter
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Controllable versusUncontrollable Costs
A cost is controllable if a manager has the power to determine or at least significantly affect the
amount incurred.
Uncontrollable costsare not within the
manager’s control or influence.
The department manager’s own
salary
Supplies used in the manager’s
department6
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22-P1: Responsibility Accounting
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An accounting system thatprovides information . . .
Responsibility Accounting System
Relating to theresponsibilities of
individual managers.
To evaluatemanagers on
controllable items.
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Successful implementation of responsibility accounting may use organization charts with clear lines of
authority and clearly defined levels of responsibility.
9P 1
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Amount of detail varies according to the level in the organization.
A department manager receives detailed reports.
A store manager receives summarized information from each department.
Responsibility AccountingPerformance Reports
10P 1
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Exhibit 22.2 Responsibility Accounting Performance Reports
P 1
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22-C1: Direct and Indirect Expenses
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Direct expenses are incurred for the sole benefit of a specific
department.
Direct and Indirect Expenses
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Multiple departments share rent, electricity, and heat.
Salary of employee who works in only one
department.
Indirect expenses benefit more than one
department and are allocated among
departments benefited.C 1
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Dept. % of Total AllocatedDepartment Sq. Feet Total Sq. Ft Cost CostJewelry 2,400 60% × 800$ = 480$ Watch repair 600 15% × 800 = 120 China and silver 1,000 25% × 800 = 200 Total 4,000 100% 800$
Illustration of IndirectExpense Allocation, Exhibit 22.3
Classic Jewelry pays its janitorial service $800 per month to clean its store. Management allocates this cost to its three departments according to the floor space each occupies.
14C 1
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22-P2: Allocation of Indirect Expenses
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Allocation of Indirect Expenses
Indirect Expense Common Allocation BasesWages and Salaries Hours worked in each
department
Rent and Related Expenses Floor space occupied
Advertising Expenses Amount of sales revenue
Equipment Depreciation Hours used in each department
Utilities Expenses Floor space occupied
Indirect expenses can be allocated to departmentsusing a number of allocation bases. Some common indirect
expenses and their allocation bases are:
16P 2
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Service Department Common Allocation BasesOffice expenses Number of employeesPersonnel expenses Number of employeesPayroll expenses Number of employeesPurchasing costs Number of Purchase OrdersMaintenance expenses Floor space occupied
Service department costs are shared, indirect expenses that support the activities of two or
more production departments.
Service Department Expenses
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Commonly used bases to allocate service department expenses include:
P 2
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22-P3: Departmental Income Statements
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Departmental Income Statements
Let’s prepare departmental income statements using the following steps:
1. Accumulating revenues and direct expenses by department.
2. Allocating indirect expenses across departments.
3. Allocating service department expenses to operating departments.
4. Preparing departmental income statements.
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P 3
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Departmental Income Statements Step 1: Accumulating revenues and
direct expenses by department
Operating Dept.
(Profit Center)Hardware
Operating Dept.
(Profit Center) Housewares
Revenues and Direct Expenses
Revenues and Direct Expenses
Direct Expenses
Direct Expenses
Service Dept.
(Cost Center) General Office
Service Dept.
(Cost Center) Purchasing
Revenues and/or Direct expenses are tracedto each department without allocation.
P 320
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Indirect expenses are allocated to all departmentsusing appropriate allocation bases.
Allocation Allocation Allocation Allocation
Service Dept. (Cost Center) General Office
Service Dept. (Cost Center)
PurchasingOperating
Dept. (Profit Center)Hardware
Operating Dept.
(Profit Center) Housewares
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Departmental Income Statements Step 2: Allocating indirect expenses across departments
P 3
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Operating Dept.
(Profit Center)Hardware
Operating Dept.
(Profit Center) Houseware
s
Service department total expenses (original direct expenses + allocated indirect expenses) are
allocated to operating departments.
Allocation Allocation
Service Dept.
(Cost Center) General Office
Service Dept.
(Cost Center) Purchasing
22
Departmental Income Statements Step 3: Allocating service department expenses to
operating departments
P 3
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Departmental Expense Allocation Spreadsheet
Expense Allocation to DepartmentsService Service Sales Sales
Allocation Total Dept. Dept. Dept. Dept.Base Expense One Two One Two
Direct expenses Salaries Payroll 20,000$ 1,000$ 2,000$ 6,000$ 11,000$ Supplies Requisitions 1,500 100 300 400 700
Step 1: Direct expenses are traced to service departments and sales departments without allocation.
23P 3
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Departmental Expense Allocation Spreadsheet
Expense Allocation to DepartmentsService Service Sales Sales
Allocation Total Dept. Dept. Dept. Dept.Base Expense One Two One Two
Direct expenses Salaries Payroll 20,000$ 1,000$ 2,000$ 6,000$ 11,000$ Supplies Requisitions 1,500 100 300 400 700 Indirect expenses Rent Floor space 10,000 1,000 1,000 3,000 5,000 Utilities Floor space 1,000 100 100 300 500 Total dept. expenses 32,500$ 2,200$ 3,400$ 9,700$ 17,200$
Step 2: Indirect expenses are allocated to both the service and the sales departments based on floor space occupied.
Of a total of 2,000 square feet, the service departments occupy 200 square feet each, Sales Department One occupies 600 square feet, and Sales Department
Two occupies 1,000 square feet.
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Ex. 200 sq ft 2000 sq ft X $10,000 = $1,000P 3
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Expense Allocation to DepartmentsService Service Sales Sales
Allocation Total Dept. Dept. Dept. Dept.Base Expense One Two One Two
Direct expenses Salaries Payroll 20,000$ 1,000$ 2,000$ 6,000$ 11,000$ Supplies Requisitions 1,500 100 300 400 700 Indirect expenses Rent Floor space 10,000 1,000 1,000 3,000 5,000 Utilities Floor space 1,000 100 100 300 500 Total dept. expenses 32,500$ 2,200$ 3,400$ 9,700$ 17,200$
Service dept. expenses Service Dept. One Sales (2,200) 1,000 1,200 Service Dept. Two EmployeesTotal expenses 32,500$ $ 0 3,400$ 10,700$ 18,400$
Sales department one has $40,000 in sales and sales department two has $48,000 in sales. Total sales = $88,000
Step 3: Service department total expenses (original direct expenses + allocated indirect expenses) are allocated to sales departments.
(In this example, based on sales dollars for each department)
Departmental Expense Allocation Spreadsheet
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Ex. $40,000 sales dept. one $88,000 total sales X $2,200 = $1,000P 3
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Departmental Expense Allocation SpreadsheetExpense Allocation to DepartmentsService Service Sales Sales
Allocation Total Dept. Dept. Dept. Dept.Base Expense One Two One Two
Direct expenses Salaries Payroll 20,000$ 1,000$ 2,000$ 6,000$ 11,000$ Supplies Requisitions 1,500 100 300 400 700 Indirect expenses Rent Floor space 10,000 1,000 1,000 3,000 5,000 Utilities Floor space 1,000 100 100 300 500 Total dept. expenses 32,500$ 2,200$ 3,400$ 9,700$ 17,200$
Service dept. expenses Service Dept. One Sales (2,200) 1,000 1,200 Service Dept. Two Employees (3,400) 1,400 2,000 Total expenses 32,500$ $ 0 $ 0 12,100$ 20,400$
Sales department one has 28 employees and sales department two has 40 employees. Total employees = 68
Step 3 (cont.): Service department total expenses (original direct expenses +
allocated indirect expenses) are allocated to sales departments.
(In this example, the allocation is based on number of employees.)
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Ex. 28 employees sales dept. one 68 total employees X $3,400 = $1,400P 3
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DepartmentalIncome Statements for
Ames Hardware Company
Sales SalesCombined Dept. One Dept. Two
Sales 88,000$ 40,000$ 48,000$ Cost of goods sold 38,000 20,000 18,000 Gross profit on sales 50,000$ 20,000$ 30,000$ Operating expenses Salaries 17,000$ 6,000$ 11,000$ Supplies 1,100 400 700 Rent 8,000 3,000 5,000 Utilities 800 300 500 Service Department One 2,200 1,000 1,200 Service Department Two 3,400 1,400 2,000 Total operating expenses 32,500$ 12,100$ 20,400$ Net income 17,500$ 7,900$ 9,600$
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Direct Expenses
Allocated Indirect
Expenses
Allocated service dept.
expenses
P 3
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Departmental contribution . . . – Is used to evaluate departmental performance.– Is not a function of arbitrary allocations of
indirect expenses.
Departmental revenue– Direct expenses = Departmental contribution to overhead
Departmental Contributionto Overhead
A department may be a candidate for elimination when its departmental contribution is negative.
28P 3
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Sales SalesCombined Dept. One Dept. Two
Sales 88,000$ 40,000$ 48,000$ Cost of goods sold 38,000 20,000 18,000 Gross profit on sales 50,000$ 20,000$ 30,000$ Direct expenses Salaries 17,000$ 6,000$ 11,000$ Supplies 1,100 400 700 Total direct expenses 18,100$ 6,400$ 11,700$ Departmental Contribution 31,900$ 13,600$ 18,300$ Indirect expenses Rent 8,000 Utilities 800 Service Department One 2,200 Service Department Two 3,400 Total indirect expenses 14,400$ Net Income 17,500$
Departmental Contributionto Overhead
Net income for the company is still $17,500.
Departmental contributions to indirect expenses (overhead) are emphasized. Departmental contributions are positive so neither
department is a candidate for elimination.
29P 3
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22-A1: Evaluating Investment Center Performance
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Evaluating Investment Center Performance
Investment center managers are responsible for generating profit and for the investment of assets. They will be evaluated based on their ability to generate enough operating income to justify the investment in assets used to generate the operating income.
31
Two performance measures are:• Investment Center Return on Assets• Investment Center Residual Income
A 1
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Investment Center Returnon Assets Invested (ROI)
ROI = Investment Center Net Income
Investment Center Average Invested Assets
LCD Division earned more dollars of income, but it was lessefficient in using its assets to generate income compared
to S-Phone Division.
32A 1
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ResidualIncome
Investment CenterNet Income
Target InvestmentCenter Net Income= –
Investment CenterResidual Income
33A 1
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NEED-TO-KNOW
Return on Investment (ROI) represents the earnings power of invested assets.
Return on investment = Net Income Average Invested Assets
$600,000 $7,500,000 8%
The media division of a company reports income of $600,000, average invested assets of $7,500,000, and a target income of 6% of invested assets. Compute the division’s
(a) return on investment and (b) residual income.
A 1
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Residual income is the amount earned above a targeted amount.
Net income $600,000 Target income ($7,500,000 x .06) 450,000 Residual income $150,000
The media division of a company reports income of $600,000, average invested assets of $7,500,000, and a target income of 6% of invested assets. Compute the division’s
(a) return on investment and (b) residual income.
NEED-TO-KNOW
A 1
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22-A2: Investment Center Profit Margin and Investment
Turnover
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Investment Center Profit Marginand Investment Turnover
Return oninvestment (ROI) =
ProfitMargin
Investmentturnover
×
Investment center salesInvestment center average assets
Investment center incomeInvestment center sales
Media Networks ROI = 23.78%
Parks and Resorts ROI= 10.4%37
A 2
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Profit margin measures the income earned per dollar of sales.
Profit margin = Net Income Sales
$2,000 $50,000 4%
A division reports sales of $50,000, income of $2,000, and average invested assets of $10,000.Compute the division’s (a) profit margin, (b) investment turnover, and (c) return on investment.
NEED-TO-KNOW
A 2
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Need to Know (24-2b)
Investment turnover measures how efficiently an investment center generates sales from its invested assets.
Investment turnover = Sales Average Invested Assets
$50,000 $10,000 5
A division reports sales of $50,000, income of $2,000, and average invested assets of $10,000.Compute the division’s (a) profit margin, (b) investment turnover, and (c) return on investment.
NEED-TO-KNOW
A 2
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Need to Know (24-2c)
A division reports sales of $50,000, income of $2,000, and average invested assets of $10,000.Compute the division’s (a) profit margin, (b) investment turnover, and (c) return on investment.
Return on Investment (ROI) represents the earnings power of invested assets.
Return on investment = Net Income Average Invested Assets
$2,000 $10,000 20%
NEED-TO-KNOW
A 2
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Need to Know (24-2d)
A division reports sales of $50,000, income of $2,000, and average invested assets of $10,000.Compute the division’s (a) profit margin, (b) investment turnover, and (c) return on investment.
Return on Investment (ROI) represents the earnings power of invested assets.
Return on investment = Profit Margin x Investment Turnover
Net Income = Net Income Sales Average Invested Assets Sales Average Invested Assets
20% = 4% x 5
NEED-TO-KNOW
A 2
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22-A3: Nonfinancial Performance Evaluation
Measures
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Innovation/LearningHow can we continually
improve and create value?
Internal Processes
In which activities must we excel?
Balanced ScorecardCollects information on several key performance indicators within each of the four perspectives.
PerformanceIndicators
Financial PerspectiveHow do we look
to the firm’s owners?
Customer PerspectiveHow do our
customers see us?
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Global ViewL’Oreal is an international cosmetics company incorporated in France.
With multiple brands and operations in over 100 countries, the company uses concepts of departmental accounting and controllable
costs to evaluate performance. A recent annual report shows the following for the major divisions in L’Oreal’s cosmetics branch:
Division Consumer products 2,051€ Professional products 615 Luxury products 1,077 Active cosmetics 311 4,054$ Non-allocated costs (577) Cosmetics branch total 3,477€
Operating Profit (€ millions)
L’Oreal’s non-allocated costs include costs that are not controllable by division managers. Excluding noncontrollable costs enables L’Oreal to
prepare more meaningful division performance evaluations. 44
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22-A4: Cycle Time and Cycle Efficiency
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Process time is the time spent producing the product and it is the only value-added time!
Order Received
ProductionStarted
Goods Shipped
Manufacturing Cycle Time
Cycle Time and Cycle EfficiencyA metric that measures the time involved in
manufacturing a product.
Total Time
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Process Time + Inspection Time+ Move Time + Wait Time
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CycleEfficiency
Value-added time
Cycle time=
Cycle Time and Cycle Efficiency
Process Time + Inspection Time+ Move Time + Wait Time
Order Received
ProductionStarted
Goods Shipped
Manufacturing Cycle Time
Total Time
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22-C2 (Appendix 22A): Transfer Pricing
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A transfer price is the amount charged when onedivision sells goods or services to another division.
LCD Displays
LCD DivisionS-Phone Division
Appendix 22A: Transfer Pricing
S-Phone can purchase displays for $80 from other
companies.
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Appendix 22A: Transfer PricingThe LCD division is producing and selling 100,000 units to
outside customers.(No excess capacity)
Transfer price = $80
With no excess capacity, the LCD manager will not accept a transfer price less than $80 per monitor. The S-Phone manager cannot buy monitors for less than $80 from outside suppliers, so
the $80 price is acceptable.
LCD DisplaysLCD Division S-Phone Division
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Appendix 22A: Transfer Pricing
Transfer price = $40 to $80
LCD Displays
LCD Division S-Phone Division
The LCD division is producing and selling less than100,000 units to outside customers. (Excess capacity)
At a transfer price greater than $40, the LCD division receives contribution margin. At a transfer price less than $80, the S-Phone
division manager is pleased to buy from the LCD division, since that price is below the market price of $80. 51
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22-C3 (Appendix 22B):Joint Costs and Their Allocation
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Appendix 22B: Joint Costsand Their Allocation
Joint costs are costs incurred to produce or purchase two or more products at the same time. Consider a sawmill company:
How should the joint costs be allocated to the different products?
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Appendix 22B: Joint Costs and Their AllocationPhysical Basis Allocation of Joint Cost
10,000 ÷ 100,000 = 10% 10% of $30,000 = $3,000
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In this sawmill, joint costs include the logs and their being cut into boards. This joint cost will need to be allocated to the different
products resulting from it. We will focus on board feet produced…
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Appendix 22B: Joint costs and Their AllocationAllocating Joint Costs on a Value Basis
$12,000 ÷ $50,000 = 24% 24% of $30,000 = $7,200
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In this sawmill, joint costs include the logs and their being cut into boards. This joint cost will need to be allocated to the different
products resulting from it. We will focus on sales value…
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End of Chapter 22
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