ACC 202 Exam 3 (Chapter 10)

Responsibility Accounting

*Responsibility Center:* Part of an organization who's manager is accountable for planning and controlling certain activities (cost center, revenue center, profit center, investment center). --Cost Center: Costs only (Bottle plant manager, warehouse manager, distribution manager, finance CFO, legal counsel, and human resources VP) --Revenue Center: Sales region (revenues only) --Profit Center: Revenues and costs (snacks division, beverage division, and confections division) --Investment Center: Revenues, costs, and long-term assets (operations VP and president and CFO).

Favorable Variance

--Operating income is higher than budgeted --When actual sales are higher than budgeted sales. --Variance of zero is occurs when actual sales is the same as budgeted sales ^^Also determined as favorable because requirements were met

Unfavorable Variance

--Operating income is lower than budgeted --When actual sales are lower than budgeted sales.

Strategies for Determining A Transfer Price

1. Market Price: Price that could be obtained in an "arms length transfer" (Fairest price). 2. Negotiated Price: Price negotiated between division managers; usually falls between variable cost and market price 3. Cost: Variable cost should be the floor or minimum cost

Common Fixed Expenses

Expenses incurred by the overarching investment center that have been allocated among the different profit centers in the division. --Ex: Proving a common computer information system, human resources department, payroll department, and legal department.

Direct Fixed Expenses

F.E. that can be traced to the profit center --Ex: Advertisement for Tropicana Orange Juice

Lag Indicators

Financial performance measures. --Current financial performance tends to reveal the results of past decisions and actions.

Cost Center

Human Resources Legal Counsel Finance CFO Bottling Plant Manager Warehouse Manager Distribution Manager

Segment Margin

Operating income generated by profit or investment center before subtracting common fixed costs that have been allocated to the center. *Contribution Margin minus Direct/Traceable Fixed Expenses*

Investment Center

Operations VP President and CEO

Segment Reporting

Part or activity of an organization about which managers would like cost, revenue, or profit data. --Ex: Plant, division, product line, customer line

Lead Indicators

Performance measures that predict future performance.

"Number of new products developed" would be a key performance indicator for which of the following? a. Customer b. Internal Business c. Financial d. Learning and Growth

b

In terms of responsibility centers, a large corporate division would be considered: a. Cost Center b. Revenue Center c. Profit Center d. Investment Center

d

Performance Evaluation Systems

Provide information/feedback for the top management after decentralization because he doesn't see day-to-day operations of the segments anymore. -Clearly communicate expectations -Provide reachable goals and goal congruency

Revenue Center

Sales Region

Profit Center

Snacks Division Beverage Division Confections Division

Decentralization

Split business into two separate operating segments based on geography, product line, customer base, and business function

Vertical integration

The practice of purchasing other companies within one's supply chain, is predicted that a company's profits can be maximized by owning one's supplier.

.Transfer Price

The sales revenue for the selling division and the cost for the buying division -Price charge within the same company but different divisions of the company --Ex: One division may purchase some of the parts it needs to produce wine turbines from another division that makes those parts. --Selling division will want the price to be as high as possible and the buying division will want the price to be as low as possible

Which of the following is false? a. The volume variance is due to causes other than volume. b. The difference between actual results and the master budget is called the master budget variance. c. The master budget variance can be split into two components: a volume variance and a flexible budget variance. d. The flexible budget is prepared using the actual volume achieved during the period.

a

Flexible Budget

Adjusted the budget for a change in actual numbers of units sold from that which was planned. *Flexible Budget uses actual sales value not expected sales value* --Master Budget Variance: Difference between the actual revenues and expenses and the master planning budget --Volume Variance: Difference between the master budget and the flexible budget. Only difference between these two budgets is the volume of units on which they are based. --Flexible Budget Variance: Difference between the actual results and the flexible budget. *Favorable Variance* is when actual sales is higher than master budget sales and when actual CM is higher than master budget CM (Or whenever costs are equal) or when actual costs are lower than budgeted costs. *Unfavorable Variance* is when actual sales is lower than master budget sales and when actual costs are higher than budgeted costs.

Performance Report

Compares actual revenues and actual expense against budgeted figures --Difference is VARIANCES

Residual Income (RI)

Determines whether the division has created any excess (or residual) income above and beyond management's expectations *RI=Operating Income-(Total assets x Minimum required rate of return)*

Advantages to Decentralization

1. *Frees top management's time:* Top management can focus on long-term strategic planning and higher-level decisions that affect the entire company because SEGMENT MANAGERS handle the small stuff now. 2. *Encourages use of expert knowledge:* Allows top management to hire the expertise each business segment needs to excel in its specific operations. SPECIALIZED KNOWLEDGE helps the segment managers make better decisions. 3. *Improves customer and supplier relations:* Segment managers maintain focus on only one segment allowing them to have close relationships with customers and suppliers. 4. *Provides training:* Segment managers have training and experience necessary to become effective top managers. They are groomed as they rank up through the company and gain knowledge. 5. *Improves motivation and retention:* Empowering segment managers to make decisions increases managers motivation and job satisfaction which often improves job performance.

Disadvantages to Decentralization

1. *Potential duplication of costs:* Cause a company to duplicate certain costs or assets. -Ex: Several business segments could maintain their own payroll and human resource departments. 2. *Potential problems achieving goal congruency:* Occurs when the goals of the segment managers align with the goals of top management. Segment managers may not fully understand the big picture , or the ultimate goals that upper management is trying to achieve. They may make decisions that are good for their segment but may be detrimental to another segment of the company or the company as a whole.

Balance Scorecard

Management must consider both financial performance measures and operational performance measures when judging the performance of a company and its segments. Because... non-financial are lead indicators and financial are lag indicators. *Key Performance Indicators (KPIs)* are summary performance metrics to asses how well they are achieving their goals. Reported on a *Performance Scorecard* which allows the manager to visually monitor and focus on managing the company's key activities and strategies. *Four different perspectives:* 1. Financial: Has our financial performance improved? -Ex of KPIs: ROI, Residual Income, Sales, CM 2. Customer: Do customers recognize that we are delivering more value? -Ex of KPIs: Satisfaction, repeat sales, referrals, # of complaints 3. Internal Business Processes: Have we improved key business processes so that we can deliver more value to our customers? -Ex of KPIs: Quality checks, time to make the product, manufacturing cycle time, error rates 4. Learning and Growth: Are we maintaining our ability to change and improve? Ex of KPIs: Hours of training, certifications, retention. Companies that embrace sustainability and social responsibility: -Human Sustainability: Healthier products -Talent Sustainability: Diverse workforce, reduce injuries, increase training and leadership -Environmental Sustainability: Improve water use efficiency, reduce fuel and electricity, recycle -Financial Performance: grow international revenues, improve brand quality scores -Responsible and sustainable sourcing: increase women owned vendors -Community and Philanthropy: Increase dollar amount to Pepsi foundation

Management By Exception

Managers will only investigate budget variances that are relatively large --Ex: You know the relative cost of your phone bill every month. If that cost comes in the same you won't pay much attention to it... you will just pay it. However, if it comes in a lot higher or lower you will look into it more.

Return on Investments (ROI)

Measures the amount of income an investment center earns relative to the size of its assets. --An increase in ROI must involve at least one of the following: 1. Increase sales 2. Reduce operating expenses 3. Reduce assets --Sales and NOI stay the same, a company's ROI will... decrease if its turnover decreases *ROI=Operating Income (NOI)/Total Assets* -Sales Margin (Profitability) NOI/sales -Capital Turnover (Productivity) Sales/Total Assets *ROI=(Sales Margin)(Capital Turnover)*

Target Rate of Return

Minimum acceptable rate of return that top management expects a division to earn with its assets. --Factors include 1. Interest rates 2. The risk level of the division's business 3. Investors' expectations 4. General economic conditions