Performance Measurement in Responsibility Accounting Explained
School
Seminole State College of Florida**We aren't endorsed by this school
Course
QMB 3600
Subject
Accounting
Date
Dec 10, 2024
Pages
27
Uploaded by ChiefLarkMaster1044
Because learning changes everything.®Chapter 22Performance Measurement and Responsibility AccountingWild and ShawFinancial and Managerial AccountingCopyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
© McGraw Hill LLCChapter 22 Learning ObjectivesCONCEPTUALC1 Explain transfer pricing and methods to set transfer prices.C2 Describe allocation of joint costs across products. (Appendix 22A)ANALYTICALA1 Analyze investment centers using return on investment and residual income.A2 Analyze investment centers using profit margin and investment turnover.A3 Analyze investment centers using the balanced scorecard.A4 Compute the number of days in the cash conversion cycle.PROCEDURALP1 Prepare a responsibility accounting report using controllable costs.P2 Allocate indirect expenses to departments.P3 Prepare departmental income statements and contribution reports.2
© McGraw Hill LLCPerformance EvaluationLarge companies may be easier to manage if divided into smaller units, called divisions, segments, or departments.In decentralized organizations, decisions are made by unit managers and top management evaluates the performance of unit managers.Access the text alternative for slide images.Learning Objective P1:Prepare a responsibility accounting report using controllable costs.3
© McGraw Hill LLCControllable versus Uncontrollable CostsAccess the text alternative for slide images.Learning Objective P1:Prepare a responsibility accounting report using controllable costs.4
© McGraw Hill LLCResponsibility accounting recognizes that control over costs and expenses belongs to several levels of management.Exhibit 22.1Access the text alternative for slide images.Learning Objective P1:Prepare a responsibility accounting report using controllable costs.5
© McGraw Hill LLCResponsibility Accounting Performance Reports (evaluate managers on what they control)Exhibit 22.2Access the text alternative for slide images.Learning Objective P1:Prepare a responsibility accounting report using controllable costs.6
© McGraw Hill LLCProfit CentersDirect and Indirect ExpensesDirect expenses are costs traced to one department because they are incurred for that department’s sole benefit. These costs are notallocatedacross departments. Examples: salaries, depreciationIndirect expenses are costs incurred for the joint benefit of multiple departments; they cannot be traced to only one department. These costs are allocatedto the departments that benefit from them. Examples: rent, utilities, advertising, insuranceLearning Objective P2:Allocate indirect expenses to departments.7
© McGraw Hill LLCAllocating Indirect ExpensesIndirect and service department expenses are allocated to departments that benefit from them. No standard rules exist regarding how to allocate indirect costs. Exhibit 22.3Exhibit 22.4Access the text alternative for slide images.Learning Objective P2:Allocate indirect expenses to departments.8Allocated costTotal cost to allocatePercentage of allocation base used
© McGraw Hill LLCAllocating Service Department Expenses•Service department (support department) costs are shared by two or more departments.•Service departments include office personnel, payroll, purchasing and maintenance.Exhibit 22.5Access the text alternative for slide images.Learning Objective P2:Allocate indirect expenses to departments.9
© McGraw Hill LLCCost Allocation Demonstration•Retail store pays an outside company to clean.•Total cost of cleaning service is $800 per month.•Management allocates cost across store’s three departments based on square feet.Exhibit 22.6Access the text alternative for slide images.Learning Objective P2:Allocate indirect expenses to departments.10
© McGraw Hill LLCDepartmental Income StatementsExhibit 22.7Exhibit 22.8Access the text alternative for slide images.Learning Objective P3:Prepare departmental income statements and contribution reports.11DepartmentalDepartmentDepartment directAllocated indirectAllocated service=incomesalesexpensesexpensesdepartment expenses
© McGraw Hill LLCStep 1:Accumulate sales revenue and direct expenses by department and total indirect expenses.Exhibit 22.9Access the text alternative for slide images.Learning Objective P3:Prepare departmental income statements and contribution reports.12
© McGraw Hill LLCStep 2:Allocate indirect expenses to all departments.Rent of $12,000 is allocated to all departments based on square feet.Advertising of $4,000 is allocated only to operating departments based on sales.Access the text alternative for slide images.Learning Objective P3:Prepare departmental income statements and contribution reports.13
© McGraw Hill LLCStep 3:Allocate service department expenses to operating departments.Purchasing expenses of $19,400 is allocated based on number of purchase orders.Exhibit 22.10Access the text alternative for slide images.Learning Objective P3:Prepare departmental income statements and contribution reports.14
© McGraw Hill LLCPrepare Income StatementsExhibit 22.11Access the text alternative for slide images.Learning Objective P3:Prepare departmental income statements and contribution reports.15
© McGraw Hill LLCDepartmental Contribution to Overhead•Departmental contributions to cover overhead equals sales minus cost of goods sold and direct expenses.•Performance measure based on controllable costs.•How much money is being contributed before indirect costs allocations?Exhibit 22.12Access the text alternative for slide images.Learning Objective P3:Prepare departmental income statements and contribution reports.16
© McGraw Hill LLCInvestment Centers Performance EvaluationsInvestment center managers are responsible for revenues and costs and for the investment in operating assets.Access the text alternative for slide images.Learning Objective A1:Analyze investment centers using return on investment and residual income.17
© McGraw Hill LLCReturn on Investment (ROI)Exhibit 22.13Access the text alternative for slide images.Learning Objective A1:Analyze investment centers using return on investment and residual income.18IncomeReturn on investmentAverage assetsfor LCD and Phone DivisionsLCDPhoneIncome750,000$ 370,000$ Average assets2,500,0001,850,000Return on Investment30%20%Comparison of Return on Investment
© McGraw Hill LLCProfit Margin and Investment TurnoverExhibit 22.15Exhibit 22.16Access the text alternative for slide images.Learning Objective A2:Analyze investment centers using profit margin and investment turnover.19
© McGraw Hill LLCResidual IncomeExhibit 22.14Target is 8% of average assets.Access the text alternative for slide images.Learning Objective A1:Analyze investment centers using return on investment and residual income.20-Residual incomeIncome Target income
© McGraw Hill LLCInnovation/LearningHow can we continuallyimprove and create value?InternalProcessesIn which activitiesmust we excel?Balanced ScorecardCollects information on several key performance indicators (KPIs) within each of the four perspectives.PerformanceIndicatorsFinancial PerspectiveWhat do our owners think of us?Customer PerspectiveWhat do ourcustomers think of us?21A 3
© McGraw Hill LLCBalanced ScorecardCollects information on key performance indicators(KPIs) within each of the four perspectives.Exhibit 22.17Access the text alternative for slide images.Learning Objective A3:Analyze investment centers using balanced scorecard.22
© McGraw Hill LLCTransfer PricingA transfer price is price to record transfers of goods across divisions of the same company.Access the text alternative for slide images.Learning Objective C1:Explain transfer pricing and methods to set transfer prices.23
© McGraw Hill LLCTransfer Pricing: No Excess CapacityThe LCD division is producing andselling 100,000 units to outside customers.(No excess capacity)•With no excess capacity, the LCD manager will not accept a transfer price less than $80 per screen. •This is a market-based transfer price.Learning Objective C1:Explain transfer pricing and methods to set transfer prices.24
© McGraw Hill LLCTransfer Pricing: Excess CapacityThe LCD division is producing and selling less than 100,000 units to outside customers. (Excess capacity)•At a transfer price of $50, the LCD division can cover variable costs plus earn a contribution margin of $20. This is cost-based transfer pricing. ($50 sales - $30 VC)•A negotiated price between variable cost and market price is called negotiated transfer price.Learning Objective C1:Explain transfer pricing and methods to set transfer prices.25
© McGraw Hill LLCCash Conversion Cycle (also known as cash-to-cash cycle)Measures average time it takes to convert cash outflows into cash inflows. Measures effective use of working capital. Lower results are preferred.Exhibit 22.20Access the text alternative for slide images.Learning Objective A4:Compute the number of days in the cash conversion cycle.26-Days’sales inDays’sales inDays’payableCash conversion cycleaccounts receivableinventoryoutstanding
© McGraw Hill LLCCash Conversion Cycle AppliedExhibit 22.21Access the text alternative for slide images.Learning Objective A4:Compute the number of days in the cash conversion cycle.27