Managerial Accounting

1. Managerial Accounting Chapter 12 - Segment Reporting

2. Chapter 12 Highlights Preparation of Segmented Income Statements (CM format) -ID Traceable Vs Common Fixed Costs Variance Analysis on target revenues and market expenses Decentralization and responsibility accounting What are cost, profit and investment centers? How do we measure center performance? Calculation of ROI (return on investment)

3. Calculation of residual income Other performance evaluation measures Performance Measures & Balance Score Cards Calculate: Delivery time, Throughput time and Manufacturing Cycle of Efficiency Transfer pricing Chapter 12 Highlights

6. Sales and Contribution Margin Sales for each segment need to be ID and recorded, as well as variable costs for each segment to provide CM per segment CM for each segment is important for making short term decisions involving capacity and use of excess capacity

10. Segment Margin Calculated by deducting a segments traceable fixed costs from it CM Indicates how much a segment is contributing towards common costs coverage and profits

11. Segment Margin

12. Responsibility Accounting Responsibility Accounting = concerned with designing report to aid in motivating individuals who have significant control over revenues and costs

13. Sales Variance Analysis What to examine the differences between budget and actual units/dollars – can be used in many ways for example to look at difference customers/products and or segments Sales Price Variance = (Actual price – budget price) x actual volume Examines the difference due to a difference sales price that budgeted for

14. Revenue Variance Analysis Market Volume Variance = (actual mkt volume – budget mkt volume) x budgeted % of market x CM per unit budgeted Places a dollar value CM of obtaining a different volume of market share than budgeted

15. Revenue Variance Analysis Market Share Variance = ((actual sales quantity – (actual mkt volume x anticipated market % share)) x budgeted cm per unit Show the change in anticipated market share while holding cm constant

16. Revenue Variance Analysis Sales Mix Variance =( actual sales quantity – actual sales quantity at budged sales mix) x budgeted CM per unit Examine the effect change in the mix of a product has

17. Revenue Variance Analysis Sales quantity variance = ((Total actual sales x original sales mix) - original budgeted sale level) x budgeted cm Examines the difference due to sale volume difference for each product

18. Common Types of Responsibility Centers Normally 3 types of Responsibility Centers can be Identified: 1) Cost Center - manager has control over costs and is evaluated on how well costs are controlled for the level of activity 2) Profit Center - manager has control over both costs and revenues, normally evaluated on ability to meet target profit levels 3) Investment Center - like a profit center but this area has control over investments decisions, normally evaluated based on ROI

20. ROI Net Income is EBIT earnings before interest and taxes for this calculations Operating Assets = net book value of cash, accounts receivable, inventory, plant and equipment plus any other assets held for productive use ROI can be improved by: 1) increasing sales, 2)decreasing expenses and 3) decreasing operating assets (JIT)

22. ROI Example

23. ROI Example

24. Criticism of ROI Use Focus is on short term not long term performance (ie cost cutting in training, inspection of light standards) ROI does not follow cash flow models used in capital budgeting

25. Criticism of ROI Use A division whose ROI is larger than that of the company may reject a project that might actually increase the ROI of the company

28. Disadvantages of Residual Income Cannot be used to compare divisions of different sizes Large division normally have larger residual incomes (due to large numbers involved) Residual income can however, be used to determine trends and target for a specific segment

29. Other Performance Measures The short comings of standard variance have cause some business to incorporate performance measures into their control systems

30. Balanced Score Card Approach Defn= set of performance measures driven by & supporting the organizations strategy Strategies can include: cost leadership, differentiation and/or focus/niche must be something employee can have an effect on and understand

31. Performance Measures 4 Groups Score Card Normally Has the following sections: Financial - tied to financial goals/objectives Customer base - to win & retain customer based Internal Business Processes - what to we need to support 1 & 2 Learning & Growth -how to react and manage change with continuous improvement

32. Performance Measures Quite often link between performance measures i.e.. Customer satisfaction increase = increased car sales Need to keep in mind: consistency so all are working together(avoid cross purposes), don’t have too many measures, ensure they are specific and measurable Balance Score Card helps track & test management strategy

33. Other Performance Measures Delivery - focus on getting increase quality product to the customer asap to retain and attract customers Involves examining delivery cycles and throughout time

34. Delivery Performance Measures Critical to focus on the customer as extremely costly to get lost customers back Need to calculate delivery time accurately in order and must deliver on time to keep customer happy Concentrate on value added activities

37. Delivery Performance

38. Delivery Cycle Example - MCE Bob Dylan Inc. keeps track of the following time related to producing and delivering 1000 units of the latest greatest hits album: Waiting time = 10 days Inspection time = .1 Processing time =.5 Move time = .2 Queue time = 2 What is the throughput time, MCE and Delivery Cycle time? Note: Process time = amt of time work is done on the product Inspection time = amt of time spent checking that the product is not defective Move time = time to move materials and 1/2 completed units from work station to work station Queue Time = amount of time product spends waiting to be worked on, to be move, inspected or stored to be shippedNote: Process time = amt of time work is done on the product Inspection time = amt of time spent checking that the product is not defective Move time = time to move materials and 1/2 completed units from work station to work station Queue Time = amount of time product spends waiting to be worked on, to be move, inspected or stored to be shipped

39. Solution Throughput time = .5 + .1 +.2 + 2 = 2.8 days MCE = .5 / 2.8 days = .178 thus once an order is put into production it is only being worked on 18% of the time and 82% of the total production time is spend on non-value added activities Delivery Cycle Time = 12.8 days

40. Transfer Pricing Fundamental Objective: Setting transfer prices to motivate the managers to act in the “best interest of the overall company”

41. Three Common Approaches:

42. Transfer Pricing

43. Transfer Pricing

44. Transfer Pricing

45. Transfer Pricing

46. Transfer Pricing

50. Suggested Problems Q12 – 1, 3, 4, 7, 11, 17, 20 E12 - 2, 3, 8, 13, 17, 19 P 12 – 22, 24, 26, 33, 35

51. The End Next Class: Chapter 13 Review