Managerial Accounting: An Introduction To Concepts, Methods, And Uses Chapter 11 Profit Center Performance Evaluation Maher, Stickney and Weil

C Learning Objectives (Slide 1 of 2) Explain the reasons for conducting variance analyses. Describe how to use the budget for performance evaluation. Identify the different types of variances between actual results and the flexible budget. Assign responsibility for variances.

C Learning Objectives (Slide 2 of 2) Describe the role of variance analysis in service organizations. Explain how to use nonfinancial performance measures to evaluate and improve processes. Explain why an effective performance measurement system requires employee involvement.

C Responsibility For Variances Variances are calculated for each responsibility center, holding all other things constant Separates marketing variances from production, production variances from purchasing, etc. Managers investigate the causes of variances and take corrective action, if necessary

C Marketing Variances (Slide 1 of 3) Marketing is usually assigned responsibility for: Sales volume variance Sales price variance Marketing cost variances

C Marketing Variances (Slide 2 of 3) Sales volume variance measures the impact on profits when sales volume is different from what was expected It is essentially a contribution margin variance equal to: Budgeted contribution margin per unit Times: (Budgeted - Actual Sales volume) = Sales Volume Variance Note that standard variable cost is used to compute contribution margin to avoid mixing cost variances with the effect of sales volume

C Marketing Variances (Slide 3 of 3) Variable marketing cost variances might be the result of incorrect amounts paid for sales commissions, shipping, etc. Accountants would investigate variances resulting from bookkeeping adjustments or errors Management would investigate marketing activities which may have caused variances Fixed marketing costs are often discretionary A favorable variance does not always indicate good performance For example, favorable variance might mean the company advertised less than planned; not necessarily good

C Administration Variances Admin. variances are often difficult to manage No well-defined causal relationship between administrative input and output Budgeted amounts are discretionary and provide a “ceiling” on costs for a particular task Does not provide a “norm” as in a flexible manufacturing budget

C Variance Diagram: Victoria’s Gourmet Coffee Total Variance $15,700 F Purchasing and Production $13,800 U Administrative Responsibility Center Type of Variance Sales Volume $21,900 F Sales Price $7,840 F Mktg. Costs $440 U $200 F Variable $12,000 U Fixed $1,800 U Variable $1,440 U Fixed $1,000 F Exhibit 11.5 Marketing $29,300 F

C Beyond the Numbers Firms have traditionally relied on financial measures to evaluate employee performance Recently, companies have begun using nonfinancial performance measures Used to direct employee’s attention to what they can control Performance evaluation begins with understanding an organization’s goals Develop measures to evaluate performance in achieving those goals

C Performance Evaluation: The Process (Slide 1 of 2) Continuous improvement - continuously reevaluating and improving efficiency of activities by: Improving activities through documentation and understanding Eliminating activities that do not add value Improving efficiency of activities that do add value

C Performance Evaluation: The Process (Slide 2 of 2) Competitive benchmarking - involves the search for, and implementation of, the best way to do something Find an activity that needs improvement Find an organization that is most efficient at the activity Study its process Implement that process

C Performance Evaluation: The Measures (Slide 1 of 4) Value chain analysis - is useful in identifying the most useful factors to measure Customer satisfaction performance measures - reflect organization's performance on Quality control Delivery performance

C Performance Evaluation: The Measures (Slide 2 of 4) Functional performance measures- efficiency of functional activities affects overall performance of organization Appropriate functional performance measures depend on the type of activity Example: Forecasting quality Percent error in sales forecast Usefulness of forecasts to decision makers

C Performance Evaluation: The Measures (Slide 3 of 4) Time Measures Product cycle time - total time to produce a good or provide a service As cycle time increases, so do costs of processing, inspection, moving, and storage Product cycle efficiency is calculated as follows: __________Processing Time______________ (Processing Time + Moving Time + Storing Time + Inspection Time) The higher the percentage, the less time and money spent on non-value-added activities

C Performance Evaluation: The Measures (Slide 4 of 4) Environmental performance - by measuring environmental performance, firms hope to provide incentives for employees to help create a clean environment Example: a performance measure to track waste minimization is: Waste Ratio (%) = Waste (in pounds) Total Output (in pounds)

C Employee Involvement (Slide 1 of 2) Involving workers in performance evaluation and improvement has three benefits: Increases employee commitment to the organization and its goals The company becomes more responsive to customers Provides motivation to workers to further develop their skills and knowledge

C Employee Involvement (Slide 2 of 2) Effective worker involvement decentralizes authority and empowers workers, but presents the following challenges: Creating a system that conveys organizational goals and critical success factors to all employees Developing performance measures that will promote goal congruence Applying performance measures consistently and accurately

C If you have any comments or suggestions concerning this PowerPoint Presentation for Managerial Accounting, An Introduction To Concepts, Methods, And Uses, please contact: Dr. Donald R. Trippeer, CPA Colorado State University-Pueblo