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Cash, Short-term Investments and Accounts Receivable. Chapter 4. Chapter 14. Activity-Based Management and Performance Measurement/Reward. Learning Objectives Chapter 14. Distinguish between value-added and non-value-added activities as part of activity-based management.

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Cash short term investments and accounts receivable
Cash, Short-term Investmentsand Accounts Receivable

Chapter 4

Chapter 4


Chapter 14
Chapter 14

Activity-Based Management and Performance Measurement/Reward


Cash short term investments and accounts receivable

Learning Objectives

Chapter 14

  • Distinguish between value-added and non-value-added activities as part of activity-based management.

  • Identify cost drivers of activities.

  • Allocate costs using activity-based costing.

  • Identify financial and nonfinancial performance measurements for different responsibility centers.

  • Discuss the use of a balanced scorecard in performance evaluation.

  • Align the use of rewards with the performance of measurement system.

Chapter 14


Cash short term investments and accounts receivable

Value Added or Non Value Added

Research & Development

Engineering

Production

Moving

Storage

Scheduling

Set-ups

Waiting

Inspecting

Rework

Chapter 14


Cost drivers
Cost Drivers

A cost driver is the factor that has a direct cause-effect relationship on a cost.

Examples include:

CostDriver

Direct Materials Units produced

Maintenance Expense Machine Hours

Supervisor Salary Labor Hours

Insurance Square Footage

Chapter 14


Activity based costing
Activity Based Costing

  • classifying costs into multiple levels of incurrence

  • (2) accumulating costs by cost drivers

  • (3) using cost drivers to assign costs to products and services.

Activity-based costing (ABC) is an overhead allocation method.

Chapter 14



Activity based costing example
Activity-Based Costing Example Costing

  • Assume that Hyde, Inc. produces two products:

  • Product Q sells for $40 and has direct material and direct labor costs of $27. Product Q requires 2.5 labor hours.

  • Product R sells for $150 and has direct material and direct labor of $89. Product R requires 6 labor hours.

  • In 2009, Hyde produced and sold 70,000 units of Q and 8,000 units of R.

  • Total overhead for 2009 was $579,000.

  • The next slide illustrates Hyde, Inc.’s overhead allocation process using the traditional cost driver of direct labor hours.

Chapter 14



Activity based costing example1
Activity-Based Costing Example Costing

  • If Hyde, Inc. used activity-based costing, the overhead would be divided into groups, and each group would be applied using a different driver.

  • Assume that the $579,800 of total overhead consists of $240,000 in material movement costs, $189,000 in utilities, $126,800 in cleanup costs, and $24,000 in setup costs.

  • The next two slide indicate the overhead allocations to the two products if ABC were used.

  • We have four drivers and allocation bases, one for each overhead category.

Chapter 14




Overhead cost comparison
Overhead Cost Comparison Costing

Chapter 14


Responsibility centers
Responsibility Centers Costing

  • Cost Center

  • Profit Center

  • Investment Center

Chapter 14


Cost center
Cost Center Costing

  • In a cost center, the only means to judge performance is an assessment of whether the center’s costs were in line with budgeted amounts.

  • Actual costs are compared to budgeted costs at the same level of activity to determine the variance amount.

Chapter 14


Cost center example
Cost Center Example Costing

  • Lee Larkind is the manager of the Reservations Department in HLS Corp.

  • For October, the department’s budget was as follows, based on an activity level of 480 hours (three people working 40 hours per week for four weeks in the month):

Chapter 14


Cost center example continued
Cost Center Example Continued Costing

  • During October, company management gave reservations employees a $0.50 per hour wage increase.

  • The employees worked a total of 500 hours, and the department reported the following costs:

Chapter 14


Cost center example continued1
Cost Center Example Continued Costing

  • At first glance, it appears that Larkind has not controlled departmental costs well during October.

  • However, the two sets of figures should not be compared directly because they have been calculated using different levels of activity.

  • The original budget first needs to be restated at the actual activity level of 500 hours before making the comparison.

Chapter 14


Profit center
Profit Center Costing

  • In a profit center, performance can be judged on both cost control and revenue generation.

  • A profit center manager’s goal is to maximize the center’s net income.

  • Performance evaluation in a profit center will also include revenue and profit measurements.

  • We can calculate two variances for a profit center.

  • The sales price variance is the difference between total actual selling price and budgeted selling price at actual volume.

  • The sales volume variance is the difference between budgeted selling price at actual volume and total budgeted sales.

  • The next slide shows the revenue variance model.

Chapter 14


Revenue variance model
Revenue Variance Model Costing

Chapter 14


Revenue center example
Revenue Center Example Costing

  • Assume that the Reservations Department from our previous example is a profit center, rather than a cost center.

  • The Reservations Department charges the hotel $10 for each reservation generated by the department.

  • It was estimated that the department would make 2,000 reservations during October; thus, expected revenue for the department was $20,000.

  • In October, the department actually generated 2,200 reservations. During the month, a new reservation system was implemented that reduced the work involved; therefore, the hotel charge per reservation was lowered to $9.50.

  • Price, volume, and revenue variances for October are shown on the next slide.

Chapter 14


Revenue center example continued
Revenue Center Example Continued Costing

Budgeted profits for the Reservations Department should also be compared to actual profits in evaluating performance as follows:

Chapter 14


Investment center
Investment Center Costing

  • In an investment center, performance can be judged on the basis of cost control, revenue generation, and return on investment.

  • Center managers can acquire, use, and sell plant assets to earn the highest rate of return on the center’s asset base.

  • In addition to the measures shown previously for cost and profit centers, an investment center’s performance can also be measure by calculating return on investment (ROI).

ROI = Income Assets

Chapter 14


Investment center example
Investment Center Example Costing

  • Assume that Larkind of the Reservations Department has control over the department’s asset base of $50,000.

  • Using the actual income of $5,075, ROI is computed as:

Chapter 14


Du pont model
Du Pont Model Costing

Profit Margin = Income ¸ Revenues

Asset Turnover = Revenues ÷ Assets

ROI = Profit Margin - Asset Turnover

Chapter 14


Du pont model example
Du Pont Model Example Costing

Using the information from the Reservations Department, we can use the Du Pont model of ROI.

Chapter 14


Cash short term investments and accounts receivable

Review Costing

During the past twelve months, the McDonald Company had a net income of $50,000. What is the amount of assets if the return on investment is 20%?

  • $100,000

  • $200,000

  • $250,000

  • $500,000

Chapter 14

27


Cash short term investments and accounts receivable

Review Costing

During the past twelve months, the McDonald Company had a net income of $50,000. What is the amount of assets if the return on investment is 20%?

  • $100,000

  • $200,000

  • $250,000

  • $500,000

Chapter 14

28


Cash short term investments and accounts receivable

Review Costing

Return on investment can be increased by

  • increasing assets.

  • decreasing assets.

  • decreasing revenue.

  • both (b) and (c).

Chapter 14

29


Cash short term investments and accounts receivable

Review Costing

Return on investment can be increased by

  • increasing assets.

  • decreasing assets.

  • decreasing revenue.

  • both (b) and (c).

Chapter 14

30


Cash short term investments and accounts receivable

Problem Review Costing

Museum Corporation uses the investment center concept for the museums that it manages. Select operating data for three of its museums for 2010 are as

  • Compute the return on investment for each division.

  • Which museum manager is doing best based on ROI? Why?

Chapter 14


Cash short term investments and accounts receivable

Problem Review Solution Costing

  • a. ROI St. Louis = $51,000/$300,000 = 17%

  • ROI Dallas = $56,000/$250,000 = 22%

  • ROI Miami = $59,000/$350,000 = 17%

  • b. Dallas is generating $.22 of income for every $1.00 of assets. The St. Louis and Miami museums are only generating $.17 per $1.00 of assets.

Chapter 14


Balanced scorecard
Balanced Scorecard Costing

  • Financial

  • Customer

  • Internal Process

  • Learning and Growth

Chapter 14



Balanced scorecard illustration continued
Balanced Scorecard Illustration Continued Costing

  • Each balanced scorecard section should indicate specific measurements that would help assess the organization’s process toward its long-run goals and objectives.

  • The measurements should be easy to understand and to compute.

  • The following slide shows some examples of nonmonetary measurements for each scorecard area other than the financial section.

Chapter 14



Cash short term investments and accounts receivable

Review Costing

The balanced scorecard measures an organization’s performance from all of the following perspectives except:

  • learning and growth

  • customer

  • government

  • financial

Chapter 14

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Cash short term investments and accounts receivable

Review Costing

The balanced scorecard measures an organization’s performance from all of the following perspectives except:

  • learning and growth

  • customer

  • government

  • financial

Chapter 14

38


Cash short term investments and accounts receivable

Review Costing

Measures of the balanced scorecard’s customer perspective include:

  • percentage of employees retained

  • market share

  • number of patents obtained

  • hours of training per employee

Chapter 14

39


Cash short term investments and accounts receivable

Review Costing

Measures of the balanced scorecard’s customer perspective include:

  • percentage of employees retained

  • market share

  • number of patents obtained

  • hours of training per employee

Chapter 14

40


Cash short term investments and accounts receivable

Activity-Based Management Costing

Activity-based management(ABM) is concerned with the activities performed during the manufacturing or service process and the related costs of those activities.

  • Analyzing Activities

    • Identification

    • Value or Non Value Added

    • Activity Costs

Chapter 14


Motivation
Motivation Costing

Benchmarking

Performance Measurement

Rewards:

Financial

Non Financial

Chapter 14


Cash short term investments and accounts receivable

Choice of Performance Measures Costing

Chapter 14


Conclusions
Conclusions Costing

  • Activities Drive Costs

  • ABC Provides More Accurate Information

  • A Performance Measurement System Allows Activities to be monitored and rewarded.

  • Success is Judged by Financial and Non Financial Measures

Chapter 14


Cash short term investments and accounts receivable

THE END! Costing

Chapter 14

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