ACCT 2302 Fundamentals of Accounting II Spring 2011 Lecture 15 Professor Jeff Yu. Review: Performance Evaluation. Evaluation Tool. Cost Center ( controls costs only ). Spending Variance; Standard Cost Variances. Profit Center (controls costs & revenues ). Segmented Income Statement
Fundamentals of Accounting II
Professor Jeff Yu
Standard Cost Variances
(controls costs & revenues)
(controls costs & revenues
Return on Investment (ROI);
AQ(AP - SP)
Labor/VOH Rate Variance
AH(AR – SR)
Materials Quantity Variance
SP(AQ - SQ)
Labor/VOH Efficiency Variance
SR(AH – SH)Review: Standard Cost Variances
AP (AR)= Actual Price (Actual Rate): the amount actually paid for
each unit of the materials (labor or VOH).
SP (SR)= Standard Price (Standard Rate): the amount that should
Have been paid for each unit of the materials (labor or VOH).
AQ (AH)= Actual Quantity (Actual Hour): the amount of materials
(labor or VOH activity) actually used in the production.
SQ (SH)= Standard Quantity (Stan. Hour) allowed for the actual output
= actualproductionin units * standard quantity (hours) per unit
- Variable Expenses
- Traceable Fixed costs
ROI = NOI ÷ AOA
AOA=Average Operating Assets
=(Beginning + Ending Operating Assets)/2
Thought Question: how will changes in sales, operating expenses and average operating assets affect ROI?
Holly Company reports the following information in 2009:
Net Operating Income $ 30,000
Sales Revenue $ 500,000
Average Operating Assets $ 200,000
(2) How will Holly’s ROI change if sales increases to $600,000 and both AOA and operating expenses do not change in 2010?
(3) How will Holly’s ROI change if there is no change in sales and AOA but operating expenses decrease to $458,000 in 2010?
(4) How will Holly’s ROI change if there is no change in sales and operating expenses, but AOA decreases to $100,000 in 2010?
DuPont Analysis: ROI = Margin * Turnover
generate the same NOI with Less
RI = NOI - Required rate of return× AOA
NOI- Net operating income (profits)AOA- Average operating assets
Required rate of return × AOA = Required return
Decision Rule: Invest if RI>0.
At Pitts Co. the required rate of return on operating assets is 8%. The 2010 sales revenue for division A is $10 million, NOI is $2 million, AOA is $2.5 million.
Q: Division A’s 2010 ROI? Margin? Turnover? Residual Income?
Given the following information for Division C:NOI $560,000Margin 35%Turnover 1.6Minimum required rate of return 12%What is the division’s residual income?
Q: (1) As a manager at Division C, will you invest in that project if you are evaluated based on division ROI (the higher the ROI, the bigger the bonus)?
(2) Is this investment project good for the company?
(3) Will your decision be different if you are evaluated using residual income?
As division manager,
I wouldn’t invest in
that project because
it would lower my pay!
Gee . . .
I thought we were
supposed to do what
was best for the
Under ROI, the basic message is:
Maximize rate of return, a percentage.
Under the residual income approach, the basic message is:
Maximize residual income, an absolute amount.
InternalbusinessprocessesThe Balanced Scorecard
Management translates its strategy into performance measures that employees understand and accept.
Has our financialperformance improved?
What are ourfinancial goals?
What customers dowe want to serve andhow are we going towin and retain them?
Vision and Strategy
Do customers recognize thatwe are delivering more value?
What internal busi-ness processes arecritical to providingvalue to customers?
Internal Business Processes
Have we improved key business processes so that we can deliver more value to customers?
Learning and Growth
Are we maintaining our abilityto change and improve?
The balanced scorecard relies on non-financial measures in addition to financial measures for two reasons:
Internal Business Processes
Learningand GrowthExample: The Balanced Scorecard
CM per car
Number of cars sold
Customer satisfactionwith options
Number ofoptions available
Time toinstall option
Employee skills in installing options
It may not be obvious to managers how to increase sales, decrease costs, and decrease investments in a way that is consistent with the company’s strategy. A well constructed balanced scorecard can provide managers with a road map that indicates how the company intends toincrease ROI.
Which internal business process should be improved?
Which customers should be targeted and how will they be attracted and retained at a profit?
At Davis Co. the required rate of return on operating assets is 8%.
The 2010 residual income of division B is $120,000, Margin is 25%, ROI is 20%.
Q: (1) What is Division B’s 2010 Turnover?
(2) What is Division B’s NOI?
(3) What is Division B’s AOA?
(4) What is Division B’s Sales?
DFW Inc.’s required rate of return is 10%. In 2009, its Division A reported the following performance data: Residual Income = $18,000, Margin = 20%, Turnover = 1.5.
Q: (1) What is Division A’s ROI in 2009?
(2) What is Division A’s NOI in 2009?
(3) What is Division A’s AOA in 2009?
(4) What is Division A’s sales revenue in 2009?