ChM11 - Chapter 11 Evaluating Performance Accounting 212 11...

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Unformatted text preview: Chapter 11 Evaluating Performance Accounting 212 11 1 Learning Objective 1 Describe centralized and decentralized management styles. Accounting 212 11 2 Centralized Management Top management makes most of the decisions. The most experienced managers are making the important decisions. Accounting 212 11 3 Centralized Management Top managers spend their time making routine decisions. Top managers may not be familiar with the routine aspects of the business. Little opportunity for lower-level employees to gain experience. Accounting 212 11 4 Decentralized Management Lower-level managers are responsible for management decisions that relate to their segment of the business. Accounting 212 11 5 Decentralized Management Spreads the decision-making responsibilities. Provides an opportunity for lower-level managers to sharpen their decision-making skills. Decisions are made by managers most familiar with the problems. Allows top management to focus on strategic decisions. Accounting 212 11 6 Decentralized Management Decisions may not entirely reflect the view of top managers. Decisions are made by less experienced managers. Accounting 212 11 7 Learning Objective 2 Describe the different types of business segments and the problems associated with determining segments costs. Accounting 212 11 8 Business Segments A business segment represents a part of a company managed by a particular individual... or a part of a company about which separate information is needed. Accounting 212 11 9 Segment Reports Managers need information that relates to their business segment. Reports that provide information pertaining to a particular business segment are called segment reports. Accounting 212 11 10 Learning Objective 3 Prepare a segment income statement. Accounting 212 11 11 The Segment Income Statement An income statement prepared for one segment of a business is called a segment income statement. Contribution income format Functional format Accounting 212 11 12 The Segment Income Statement QUINTANA COMPANY MIAMI OFFICE Segment Income Statement For the Year Ended December 31, 2004 Sales Variable cost Contribution margin Fixed cost for Miami office Segment margin $1,200,000 800,000 $ 400,000 300,000 $ 100,000 Accounting 212 11 13 Identifying Segment Costs By definition, variable costs are "caused" by some sort of activity or volume. If that activity or volume is related to a particular segment, then so is the variable cost. Fixed costs are more difficult to trace. Accounting 212 11 14 Identifying Segment Costs Fixed costs that arise to support a single segment are called direct (or traceable) fixed costs. Fixed costs that are related to more than one segment are common (or indirect) fixed costs. Accounting 212 11 15 Flandro Feed Stores Segment Income Statement For the Year Ended December 31, 2005 Company Total Sales $500,000 Variable cost 332,950 Contribution margin $167,050 Direct fixed cost 75,000 Segment margin $ 92,050 Common fixed cost 60,000 Net income $ 32,050 1 North Store $105,000 73,750 $ 31,250 20,000 $ 11,250 12,6001 $ (1,350) South Store $225,000 141,000 $ 84,000 32,000 $ 52,000 27,0002 $ 25,000 Central Store $170,000 118,200 $ 51,800 23,000 $ 28,800 20,4003 $ 8,400 $105,000 $500,000 = 21% $60,000 = $12,600 2$225,000 $500,000 = 45% $60,000 = $27,000 3$170,000 $500,000 = 34% $60,000 = $20,400 Accounting 212 11 16 Flandro Feed Stores With North Store Eliminated Segment Income Statement For the Year Ended December 31, 2005 Company Total Sales $395,000 Variable cost 259,200 Contribution margin $138,800 Direct fixed cost 55,000 Segment margin $ 80,800 Common fixed cost 60,000 Net income $ 20,800 2 North Store South Store $225,000 141,000 $ 84,000 32,000 $ 52,000 34,2002 $ 17,800 Central Store $170,000 118,200 $ 51,800 23,000 $ 28,800 25,8003 $ 3,000 $225,000 $395,000 = 57% $60,000 = $34,200 3$170,000 $395,000 = 43% $60,000 = $25,800 Accounting 212 11 17 Flandro Feed Stores Without Allocation of Common Fixed Cost Segment Income Statement For the Year Ended December 31, 2005 Company North Total Store Sales $500,000 $105,000 Variable cost 332,950 73,750 Contribution margin $167,050 $ 31,250 Direct fixed cost 75,000 20,000 Segment margin $ 92,050 $ 11,250 Common fixed cost 60,000 Net income $ 32,050 South Store $225,000 141,000 $ 84,000 32,000 $ 52,000 Central Store $170,000 118,200 $ 51,800 23,000 $ 28,800 Accounting 212 11 18 Allocating Service Department Cost Service department Possible allocation basis Personnel dept. Number of employees Number of employees Cafeteria Number of meals served Finance dept. Capital invested Computer Computer mainframe time operations No. of personal computers Sq. ft. of building occupied Maintenance Hours of maintenance Accounting 212 11 19 ActivityBased Allocation This cost allocation method tends to be more fair and accurate. Managers will work to reduce the allocation base. Accounting 212 11 20 Evaluating Business Segments Revenue centers Cost centers Profit centers Investment centers Accounting 212 11 21 Learning Objective 4 Describe and calculate the return on investment. Accounting 212 11 22 Return on Investment Return on investment (ROI) is the percentage return generated by an investment in a business or business segment. Accounting 212 11 23 Return on Investment Lisa Company Eastern Division $896,750 income $10,550,000 investment = ROI 8.50% Western Division $857,500 income $9,800,000 investment = ROI 8.75% The company's required ROI is 8%. Accounting 212 11 24 Effect of New Investments An investment opportunity for the Eastern Division promises additional income of $123,750 and requires an additional investment of $1,500,000. What is the ROI? Accounting 212 11 25 Effect of New Investments $123,750 New income $1,500,000 Investment = ROI 8.25% Accounting 212 11 26 Effect of New Investments Eastern Division Without new investment $896,750 Income $10,550,000 Investment = ROI 8.50% Eastern Division With new investment $1,020,500 Income $12,050,000 Investment = ROI 8.47% Accounting 212 11 27 Learning Objective 5 Describe and calculate residual income and economic value added (EVA)TM . Accounting 212 11 28 Residual Income and (EVA)TM Residual income is a technique that focuses on the amount by which a segment's actual income exceeds the income needed to meet the company's required rate of return. (EVA)TM is similar to residual income adjusted. Accounting 212 11 29 Calculating Residual Income The company's required ROI is 8%. Eastern Division Actual income $896,750 Less: Required income ($10,550,000 8%) 844,000 Residual income $ 52,750 Accounting 212 11 30 Calculating Residual Income The company's required ROI is 8%. Western Division Actual income $857,500 Less: Required income ($9,800,000 8%) 784,000 Residual income $ 73,500 Accounting 212 11 31 Calculating Residual Income Residual income with new investment opportunity: Eastern Division Actual income $1,020,000 Less: Required income ($12,050,000 8%) 964,000 Residual income $ 56,000 Accounting 212 11 32 Calculating Residual Income Residual income without new investment opportunity: $52,750 Residual income with new investment opportunity: $56,000 Accounting 212 11 33 Learning Objective 6 Describe the balanced scorecard and the importance of nonfinancial performance measures. Accounting 212 11 34 Four Balanced Scorecard Perspectives Financial perspective Customer perspective Internal processes perspective Strategy Innovation perspective Accounting 212 11 35 Four Balanced Scorecard Perspectives To succeed financially Operating income ROI EVA Sales growth Cost reductions Financial Customer To achieve our vision of how we should appear to our customers No. of new customers Customer retention Market share Time to fill orders Customer satisfaction 11 36 Accounting 212 Four Balanced Scorecard Perspectives To excel at having superior business processes to satisfy our shareholders and customers To sustain our ability to change and improve. Process quality measures Lead time Defect rates Scrap measures Internal Innovation and learning Employee retention Employee productivity Training Reskilling Suggestion system 11 37 Accounting 212 JustinTime Philosophy The (JIT) philosophy involves eliminating all unnecessary inventory and limiting the use of company resources. Accounting 212 11 38 JustinTime Philosophy Zero defects Setup time Throughput time Accounting 212 11 39 JustinTime Philosophy Lead time Unscheduled downtime Accounting 212 11 40 Commitment to JIT Managers who are committed to the JIT philosophy tend to think about improving efficiency on a regular basis. They need the help of committed employees to pull it off. Total company commitment is necessary for the JIT approach to succeed. Accounting 212 11 41 End of Chapter 11 Accounting 212 11 42 ...
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