accounting notes for final

Page 1

Chapter Ten: Performance Evaluation

How Does Decentralization Affect Performance Evaluation?

centralized decision making: often smaller companies, the owner/top manager makes all planning/operating decisions

decentralized decision making: operations split into different operating segments; top mgmt delegates decision-making responsibility to segment managers

decentralization frees top mgmt's time, encourages use of expert knowledge, improves customer relations, provides training, and improves motivation and retention

problems include potential duplication of costs, and potential problems achieving goal congruence

goal congruence: occurs when the goals of the segment managers align with the goals of top mgmt

performance evaluation systems provide top mgmt with feedback to maintain control over entire org

What is Responsibility Accounting?

responsibility center: part of an org whose manager is accountable for planning and controlling certain activities

responsibility accounting: system for evaluating the performance of each responsibility center and its manager

cost center: managers accountable for costs only

revenue center: managers accountable primarily for revenues

profit center: managers accountable for both revenues and costs (profits)

investment center: managers responsible for generating revenues, controlling costs, efficiently managing the division's assets

performance reports: compare actual revenues and expenses against budgeted figures; variance: diff b/w actual and budget

favorable variance: causes operating income to be higher than budgeted; unfavorable variance: causes operating income to be lower than budgeted

management by exception: managers only investigate variances that are relatively large

segment margin: operating income generated by profit or investment center before subtracting common fixed cost that have been allocated to that center

direct fixed expenses: can be traced directly to profit center

common fixed expenses: can't be traced directly to profit center; incurred by overarching investment center; managers of profit centers aren't responsible for the allocation of these --> responsible for segment margin, not operating income

return on investment (ROI): operating income/total assets; measures amount of income an investment center earns relative to size of assets

ROI = (operating income/sales) x (sales/total assets) // sales margin x capital turnover

sales margin: focuses on profitability by showing how much operating income division earns on every $1 of sales revenue

capital turnover: focuses on how efficiently the division uses its assets to generate sales revenue

residual income: RI = operating income - minimum acceptable income; determines whether division has created any excess income above mgmt's expectations

minimum acceptable income = target rate of return x total assets

What is Transfer Pricing?

transfer price: price charged for internal sale of product between two different divisions of the same company

vertical integration: practice of purchasing other companies within one's supply chain

How do Managers Use Flexible Budgets to Evaluate Performance?

Page 2