SEC C: Performance Management

Performance Management Process

Plays a central role in decision making by aligning operational activities with strategic goals. It includes the following interconnected stages: Planning, Controlling, Evaluating.

Operational planning

This stage is where the strategy is defined into operational objectives, performance measures are set, and resources are committed. This is the budgeting process for the org.

Unfavorable fixed OH spending variance

A company paid more property tax on their manufacturing facility this year than they were expecting. This would most likely cause an:

Variable Overhead Spending Variance

(Actual Activity Used x Std. Rate) - Actual Costs

Variable Overhead Efficiency Variance

(Std. Activity Allowed - Actual Activity Used) x Std. Rate

Fixed Overhead Spending Variance

Master Budget - Actual Costs Spent

or

(Master Budget Production Volume x FOH Rate) - Actual Costs Spent

Fixed Overhead Volume Variance (Production Volume Variance)

Applied Costs - Master Budget Costs

or

(Budgeted Production Volume - Actual Production Volume) x FOH Rate

or

(Budgeted Hours - Std. Allowed) x FOH Rate

Price Variance - Variable Selling Overhead

Actual Qty. Delivered x (Std. Price - Actual Price)

Efficiency Variance - Variable Selling Overhead

(Std. Delivery Events Allowed - Actual Qty. Delivered) x Std. Rate

Overhead efficiency

It is based on the difference between the actual quantity and standard quantity of the overhead allocation activity basis. Typically these activity bases are machine hours, labor hours, or production units. The production supervisor has control over these amounts.

Labor efficiency

It is based on the difference between the actual labor hours used and standard labor hours used. The production supervisor has control over this amount.

Overhead volume

The amount being produced within a period is largely determined by the sales forecast, which is generally more influenced by the sales department. Thus, the production supervisor would have little control over these amounts.

Material usage

It is based on the difference between the actual quantity of inputs used and the standard quantity of inputs allowed. The production supervisor has control over this amount.

Unfavorable labor rate variance

Suggests that the labor cost was higher than anticipated. The mix of workers assigned to the particular job was heavily weighted toward the use of higher-paid, more experienced individuals. Results in a favorable labor efficiency variance.

Favorable labor efficiency variance

Implies that more productive work occurred than had been expected.

Favorable labor rate variance

The mix of workers assigned to the particular job was heavily weighted toward the use of new, relatively low-paid unskilled workers. Results in an unfavorable labor efficiency variance.

Unfavorable labor efficiency variance

1) Because of the production schedule, workers from other production areas were assigned to assist this particular process. 2) Defective materials caused more labor to be used in order to produce a standard unit.

Unfavorable usage variance

If the actual number of pounds of materials used exceeds standard pounds allowed, this will result in an ___________.

Favorable price variance

If actual price of material is less than standard price, this will result in a __________.

Direct material price variance (on Purchased)

Actual qty. purchased x (Std. Price - Actual Price)

Direct material price variance (on Amount used)

Actual Qty. Used x (Std. Price - Actual Price)

Direct material usage variance

(Std. Qty. Allowed - Actual Qty.) x Std. Price

Direct labor rate variance

Actual Hours x (Std. Rate - Actual Rate)

Direct labor efficiency variance

(Std. Hours Allowed- Actual Hours) x Std. Rate

This should equal the sum of Mix variance and Yield variance.

Mix variance

Total Actual Hours Used x (Std. Mix % - Actual Mix %) x Std. Price

Yield variance

(Total Actual Hours Used - Total Std. Hours Allowed) x Std. Mix % x Std. Price

No variance

If actual sales volume and total expected sales volume equal each other, this means there will be ________.

Controlling

This stage requires that expectations are established and incentivized, and results are gathered and reported. It is in the process that management accountants capture and report variances.

Evaluating

This stage involves rewarding performance, determining why objectives were met or not, and using the insight gained to complete the feedback loop and inform the planning stage for the upcoming operational cycle.

Performance Analysis

Begins by capturing and reporting variances in operations (Controlling), and then determining causes for variances in order to incentivize employees (Evaluating).

Flexible budget

It is built after the conclusion of the operating period and is based on actual production and sales volumes. Focused on efficiency of inputs used to produce and sell the actual volume of products or services.

Budgeted fixed costs

This part of the budget is the same for both the master budget and the flexible budget.

Master budget

Also called the static budget. Based on the original expectations for production and sales volumes before the start of the operating period. Used to assess the effectiveness of performance output involving sales volumes.

Variances

Tools in the controlling progress and evaluating process

Effectiveness

It is about achieving output goals → Revenue

Efficiency

It is about achieving input goals → Costs

Ceteris paribus

“All other things being equal”

Isolate the issue and its effect on profit. Favorable isn’t always “Good.” Unfavorable isn’t always “Bad.”

Management by Exception

Variances help managers to focus. Variances don’t solve the mystery. Variances are signals to investigate.

Revenue performance

The result of quantities sold and prices received.

Cost performance

The result of quantities used and prices paid.

Sales price variance

Actual volume x (Standard price - Actual price)

Isolates the effect of price on operating profits.

Sales volume variance (Price)

(Expected volume - Actual volume) x Standard price

Isolates the effect of the quantity on operating profit.

Before

When determining whether the variance is Favorable (F) or Unfavorable (U), it is best to make this determination ______ computing the variance. Consider the factor being isolated (price or quantity).

Standard contribution margin per unit

Used to isolate the effect of the sales volume variance on operating profit, rather than the std. sales price per unit.

Sales volume variance (CM)

(Expected volume - Actual volume) x Standard CM

To understand the bottomline effect on operating profit.

Sales Mix Variance

Total Actual Volume x (Expected mix % - Actual mix %) x Standard CM

Note: Use the precise % number; do not round off

Sales Quantity Variance

(Total expected volume - Total actual volume) x Expected mix % x Standard CM