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1、Responsibility Centers and Financial Control,Chapter 12,Learning Objective 1,Describe the form and nature of variance analysis and apply its basic insights.,Variances,What are variances?Variances are differences between actual and estimated costs.Variance analysis is a necessary step to understand w
2、hy a difference occurred.,First-Level Variances,The first-level variance for a cost item is the difference between the actual and master budget costs.Variances are“favorable”if the actual costs are less than estimated costs.Variances are“unfavorable”if the actual costs exceeds estimated costs.,First
3、-Level Variances,Canning Cellular Services(000),Master ActualBudget Costs DifferenceDirect Material Welcome Package25,000 29,7004,700Direct Labor Sales Staff12,500 14,8502,350 Technical Staff10,000 10,890 890Support Cost Data Processing 3,000 3,960 960 System Activation45,000 42,900 2,100Total Custo
4、mer-Related Costs95,500102,3006,800,Decomposing Variances,What are flexible budgets?Flexible budgets recast cost targets in the planned or master budget to reflect the actual level of production.This allows comparisons of actual results to targets based on the achieved level of production.,Decomposi
5、ng Variances,What are planning variances?They reflect the effect of the volume change between the master budget and actual activity level achieved.What are flexible budget variances?They show the differences between the flexible budget and the actual results.,Decomposing Variances,Master Budget Flex
6、ible Budget=Planning Variance,Flexible Budget Actual Results=Flexible Budget Variance,Planning variances and flexible budgetvariances are called secondary variances.,Decomposing Variances,What is the direct material efficiency or usage variance?It is actual quantity used at target or standard price
7、less the flexible budget allowance at the planned or target price.Usage Variance=(AQ SQ)SPWhat is the direct material price variance?Price Variance=(AP SP)AQ,Decomposing Variances,What is the efficiency or usage variance for direct labor costs?Efficiency Variance=(AH SH)SRWhat is the rate variance f
8、or direct labor costs?Rate Variance=(AR SR)AHSupport costs can also be analyzed in detail.,Decomposing Variances,Support costs can reflect flexible or capacity-related costs.The quantity of capacity-related costs may not change from period to period,but the spending on them may fluctuate.What are fl
9、exible support costs?They reflect operations that are proportional to the volume of activity.,Decomposing Variances,Master Planning FlexibleBudget Variance BudgetDirect Material Welcome Package25,000 2,500 27,500Direct Labor Sales Staff12,500 1,250 13,750 Technical Staff10,000 1,000 11,000Support Co
10、st Data Processing 3,000 300 3,300 System Activation45,000 4,500 49,500Total Customer-Related Costs95,500 9,550105,050,Canning Cellular Services(000),Decomposing Variances,Flexible Actual Budget Variance ResultsDirect Material Welcome Package 2,200 29,700Direct Labor Sales Staff 1,100 14,850 Technic
11、al Staff 110 10,890Support Cost Data Processing 660 3,960 System Activation 6,600 42,900Total Customer-Related Costs 2,750102,300,Canning Cellular Services(000),Decomposing Variances,The following information relates to Canning Cellular Service:The actual number of new customers were 1,100,000.,Dire
12、ct MaterialsSQ:1 AQ:1SP:$25 AP:$27,Direct LaborSales StaffSH:.50 AH:.45SR:$25 AR:$30,Decomposing Variances,Direct LaborTechnical StaffSH:.25 AH:.22SR:$40 AR:$45,Support CostData ProcessingSH:.20 AH:.24SR:$15 AR:$15,Support CostSystem ActivationSH:.15 AH:.12SR:$300 AR:$325,Decomposing Variances,Mater
13、ials efficiency variance=0Materials price variance:($25 SP$27 AP)1,100,000=$2,200,000 UFlexible budget variance=$2,200,000 USales staff efficiency variance:(550,000 SH 495,000 AH)$25=$1,375,000 F,Decomposing Variances,Sales staff rate variance:($25 SR$30 AR)495,000=$2,475,000 UFlexible budget varian
14、ce=$1,100,000 UTechnical staff efficiency variance:(275,000 SH 242,000 AH)$40=$1,320,000 F,Decomposing Variances,Technical staff rate variance:($40 SR$4 AR)242,000=$1,210,000 UFlexible budget variance=$110,000 F Support cost data processing efficiency:variance(220,000 SH 264,000 AH)$15=$660,000 URat
15、e variance=0Flexible budget variance=$660,000 U,Decomposing Variances,Support cost system activation efficiency variance:(165,000 SH 132,000 AH)$300=$9,900,000 FSupport cost system activation rate variance($300 SR$325 AR)132,000=$3,300,000 U Flexible budget variance=$6,600,000 F,Decomposing Variance
16、s,MasterBudget,FlexibleBudget,ActualResults,Planning Variance,Flexible Budget Variance,Total Variance,Decomposing Variances,Usage Variance,Flexible Budget Variance,Actual Quantity Standard Price,Standard Quantity Standard Price,Actual Quantity Actual Price,Price Variance,Decomposing Variances,Second
17、 Level VariancesPlanning variancesFlexible budget variances,First Level VariancesDifference between the actualand master budget costs,Third Level VariancesUse and price variances,Learning Objective 2,Show why organizations use responsibility centers.,Decentralization,What are centralized organizatio
18、ns?Organizations which reserve most of the decision-making power for senior executives.Centralization works effectively in organizations with stable environments.,Decentralization,What are decentralized organizations?Organizations which delegate a good deal of the decision-making authority to lower-
19、level managers.Decentralized organizations are effective in environments requiring quick responses to change.,Decentralization,Three conditions are necessary for effective decentralization:Employees must be given,and accept,the authority and responsibility to make decisions.,Decentralization,Employe
20、es must have the training and skills they need to accept the decision making responsibility.The organization must have a system in place that guides and coordinates the activities of decentralized decision makers.,Controlling Operations,The major purpose of decentralization is to give decision maker
21、s the responsibility to make operating decisions.This creates a need for operations control.What is the focus of operations control?It focuses on finding the best operating decisions.,Controlling Operations,What is the focus of financial control?It focuses on an overall assessment of how well operat
22、ions control is working to improve financial performance.,Learning Objective 3,Recognize the common forms of responsibility centers.,Responsibility Centers,What is a responsibility center?It is an organization unit for which a manager is made responsible.The centers manager and supervisor establish
23、specific and measurable goals for the responsibility center.The goals should promote the long-term interest of the organization.,Responsibility Centers,Responsibility centers are classified into four types:Cost centersRevenue centersProfit centersInvestment centers,Responsibility Centers,What is a c
24、ost center?It is a responsibility center whose employees control costs but do not control its revenues or investment level.,Responsibility Centers,What is a revenue center?It is a responsibility center whose members control revenues but do not control the cost of the product or service they sell or
25、the level of investment in the responsibility center.,Responsibility Centers,What is a profit center?It is a responsibility center whose manager and other employees control both the revenues and the costs of the product or service they sell or deliver.,Responsibility Centers,What is an investment ce
26、nter?It is a responsibility center whose manager and other employees control the revenues,costs,and the level of investment in the responsibility center.,Learning Objective 4,Identify the issues to consider and basic tools to use in assessing the performance of a responsibility center.,Evaluating Re
27、sponsibility Centers,Underlying the accounting classifications of responsibility centers is the concept of controllability.The controllability principle asserts that people should only be held accountable for results that they can control.It is often difficult to apply the controllability principle.
28、,Evaluating Responsibility Centers,What are some problems associated with controllability?jointly earned revenues and/or jointly incurred costsintricate,and often arbitrary,accounting procedures,Learning Objective 5,Assess the issues and problems created by revenue and cost interactions in evaluatin
29、g the performance of an organization unit.,Using Segment Margin Reports,What is a segment margin?It is the level of controllable profit reported by an organizational unit or product line.,Using Segment Margin Reports,Revenue$950,000$1,250,000$2,200,000Variable Costs 750,000 950,000 1,700,000Contribu
30、tion Margin$200,000$300,000$500,000Other Costs 75,000 60,000 135,000Segment Margin$125,000$240,000$365,000Allocated Costs 70,000 80,000 150,000Income$55,000$160,000$215,000Unallocated Costs 300,000Organization Profit($85,000),New Car Sales,Used Car Sales,Total,Using Segment Margin Reports,What type
31、of problem can occur when organizations evaluate responsibility centers as profit centers?identifying responsibility for the control of sales and costs,Using Segment Margin Reports,Organizations use two different approaches to evaluate segment margin numbers:Past performanceIs performance this perio
32、d reasonable,given past experience?Comparable organizationsHow does performance compare to similar organizations?,Using Segment Margin Reports,What are some limitations of segment margin reporting?Margins can be highly aggregated summaries.Some segment reports contain arbitrary,or soft,numbers.Reven
33、ue figures often reflect assumptions and allocations that can be misleading.,Using Segment Margin Reports,Because of these limitations,interpreting segment margins should be done carefully.Other critical success factors should be used as well to assess performance.,Learning Objective 6,Identify the
34、transfer-pricing alternatives available to organizations and the criteria for choosing a transfer pricing alternative.,Transfer Pricing,What is transfer pricing?It is a set of tools and methods used to attribute revenues earned by the organization to organization sub-units.,Transfer Pricing,Transfer
35、 pricing can be very arbitrary,especially if there is a high degree of interaction among the responsibility centers.,Transfer Pricing Interrelationships,Body Shop Department,Service Department,Leasing Department,Used Car Department,New Car Department,New Car Preparation,Repairs,Repairs,New Car Prepa
36、ration,Used Cars,Used Cars,Used Cars,Approaches to Transfer Pricing,There are four approaches to transfer pricing:Market-BasedCost-BasedNegotiatedAdministered,Approaches to Transfer Pricing,Market-Based Transfer PricingIf a good external market existsfor the transferred product or service,then marke
37、t prices are the mostappropriate basis for pricing.Unfortunately,these marketswith well-defined prices seldom exist.,Approaches to Transfer Pricing,Cost-BasedTransfer PricesVariable cost plus a markupFull costFull cost plus a markup,Approaches to Transfer Pricing,What are some concerns about cost-ba
38、sed transfer prices?Cost-based transfer prices do not provide the appropriate economic guidance when operations are capacity constrained.They do not focus on the intent of the system,which is to allow calculation of unit incomes.,Approaches to Transfer Pricing,Economists argue that only marginal cos
39、t transfer prices are optimal.If the transfer price is higher than the marginal costthe supplying unit wants to sell more than the optimal quantity,and the purchasing unit wants to buy fewer than the optimal quantity.,Approaches to Transfer Pricing,NegotiatedTransfer PricesSupplying and receiving re
40、sponsibilitycenters negotiate prices.Prices reflect both negotiating skillsand economic considerations.Optimal transfer price is thethe net realizable value of the last unitsupplied for all units supplied.,Approaches to Transfer Pricing,NegotiatedTransfer PricesReflect the accountability and control
41、labilityprinciples underlying responsibility centersCan easily lead to decisions thatdo not provide the greatest economic benefits,Approaches to Transfer Pricing,AdministeredTransfer PricesPrices set by a rule,policy,or an arbitratorEasy to administerArbitraryTend to violate the spirit ofthe respons
42、ibility approach,Learning Objective 7,Use return on investment and economic value added as financial control tools.,Efficiency and Productivity Elements of ROI,ROI=Operating Income Investment,ROI=Operating Income Sales Sales Investment,ROI=Return on Sales Asset Turnover=Efficiency Productivity,Effic
43、iency and Productivity Elements of ROI,What is efficiency?It is a measure of an organizations ability to control costs.,Operations Efficiency=Standard Cost Actual Cost,Efficiency and Productivity Elements of ROI,What is productivity?It is a ratio of output to input.In financial control,this is the r
44、atio of sales to investment.,Assessing Return on Investment,Analyze trends.Compare to competitors.Decompose and compare to competitors.Look for signals suggesting where there might be problems.,Using Economic Value Added,What is economic value added?It is an investment criterion,previously called re
45、sidual income.,Economic Value Added=Income Cost of Capital,Using Economic Value Added,EVA evaluates income relative to the level of investment required to earn that income.It motivates managers to do what they think is necessary to make economic value added as large as possible.,Learning Objective 8
46、,Identify the limitations of financial controls.,The Efficacy of Financial Control,What are some criticisms of financial control?Information is delayed.Information is highly aggregated.Its measures are narrow and do not evaluate how well the organization is doing in meeting stakeholders requirements
47、.It is too focused on short-term results.,The Efficacy of Financial Control,How should we interpret these facets of financial control?Financial control is an important tool in the process of control.Used properly,it provides crucial help in assessing the organizations long-term viability and identifying processes that need improvement.,End of Chapter 12,
