Accounting 202 Chapter 10

Expanded ROI

(Operating Income / Sales) * (Sales / Total assets)

Cost Center examples:

-Bottling Plant Manager -Warehouse Manager -Distribution manager -Finance CFO -Legal Counsel -Personnel VP

Learning and Growth

House of training, certifications, retention

Direct (or traceable) fixed expenses

Include those fixed expenses that can be traced to the profit center.

Common fixed expenses

Include those fixed expenses that cannot be traced to the profit center.

Drawback of residual income:

It cannot be used to compare the performance of divisions of different sizes.

RI is an

actual number

ROI is a

perecentage

Internal Business Processes

Quality checks, time to make the product, manufacturing cycle time, error rates

Financial Perspective

ROI, RI, Sales, Contribution Margin

Investment Center

Responsible for revenues, costs, and efficiently managing long-term assets. These are generally large divisions of the corporation. For example, PepsiCo has six divisions: (1) Frito-Lay North America, (2) Quaker Foods North American, (3) Latin America Foods, (4) PepsiCo Americas Beverages, (5) Europe, (6) Asia, Middle East, and Africa

Segment Margin Formula

Sales Less Variable expenses =Contribution Margin Less Traceable fixed costs =Segment Margin Less common fixed costs =NOI

Capital Turnover=

Sales / Total Assets

ROI=

Sales Margin * Capital Turnover

Customer Perspective

Satisfaction, repeat sales, referrals, # of complaints

Companies that decentralize..

Split their operations into different operating segments. Top management delegates decision-making responsibility to the segment managers.

Variance

The difference between actual and budget

Master-budget variance

The difference between the actual revenues and expenses and the master budget

Market Price

The fariest price, the price that could be obtained in an open market in an "arms length transaction"

Segment Margin

The operating income generated by a profit or investment center before subtracting common fixed costs that have been allocated to the center.

Transfer Price

The sales revenue for the selling division and the cost for the buying division

Key Performance Indicators (KPIs)

These are summary performance metrics to assess how well a company is achieving its goals.

Balanced Score Card

This recognizes that management must consider both financial performance measures and operational performance measures when judging the performance of a company and its segments.

To build a segmented income statement:

Use a contribution format to separate fixed from variable costs and calculate a contribution margin; then identify fixed costs that can be traced to the segment, and label fixed costs that cannot be traced to segments as "common"

Cost

VARIABLE cost is the lowest

Segment Reporting

A segment is a part or activity of an organization about which managers would like cost, revenue, or profit data. Examples: Plant, division, product line, customer line

Responsibility accounting

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

Flexible Budgets

Adjusts the budget for a change in actual number of units sold from that which was planned.

Negotiated Price

Division managers negotiate; usually between variable cost and market price

Investment Center examples:

-Operations VP -President and CEO

Profit Center examples:

-Snacks Division -Beverage Division -Confections Division

For example, decentralization may be based on

-geographic area -product line -distribution channel -customer base -business function

The four perspectives of the Balanced Scorecard

1) Financial Perspective 2) Customer Perspective 3) Internal Business Perspective 4) Learning and Growth Perspective

Advantages of Decentralization

1) Frees top management's time to focus on strategic planning 2) Encourages use of expert knowledge 3) Improves motivation and retention

Any increase in ROI must involve at least one of the following:

1) Increased sales 2) Reduced operating expenses 3) Reduced operating assets

Why do balanced scorecards rely on non financial measures as well as financial measures?

1) Non financial measures are lead indicators of future financial performance; financial indicators are lag performance 2) Lower-level managers are most often responsible for non financial measures

Disadvantages od Decentralization

1) Potential duplication of costs and effort 2) Lower level managers might not see the big picture (goal congruence)

A responsibility center is..

A part of an organization whose manager is accountable for planning and controlling certain activities.

Revenue Center

Managers are primarily responsible for revenues. GEOGRAPHIC AREAS, sales territories within the country.

Profit Center

Managers are responsible for both revenues and costs, and therefore profits. For example, at PepsiCo, a manger may be responsible for the entire line of brand products, such as Mountain Dew or Aquafina.

Cost center

Managers responsible for costs only. Manufacturing operations, such as the Frito- Lay plant in Casa Grande, Arizona are cost centers. The plant manager controls costs by using lean thinking to eliminate waste.

Management by exception

Managers will only investigate budget variances that are relatively large

Revenue Center examples:

Many times, revenue centers are sales territories, such as geographic areas within the country.

Return on Investment (ROI)

Measures the amount of income and investment center earns relative to the size of its assets

Sales Margin=

NOI / Sales

Favorable variance

One that causes operating income to be higher than budgeted. This occurs when actual revenues are higher than budgeted or actual expenses are lower than budgeted.

Unfavorable variance

One that causes operating income to be lower than budgeted. This occurs when actual revenues are lower than budgeted, or actual expenses are higher than budgeted.

ROI

Operating Income / Total Assets

Residual Income=

Operating income - (Total assets * Minimum required rate of return)