Ch.10

Exam Reminder

• Due Tomorrow Night: Extra credit assignment by midnight.

• Potential Points: Earn up to 8 points.

• Importance: Even fractional points can impact letter grades.

• Additional Opportunities: More small extra credit opportunities at the end of the semester.

Chapter Content Overview

• Focus Chapters: Chapter 9 to Chapter 12 emphasis on budgets for planning operations and performance evaluation

• Chapter 10 Purpose: Examines budget use for operational information and performance accountability for managers.

• Main Concepts: 1. Budgetary Control: Keeping track of budgets to stay aligned with goals.

  2. Responsibility Accounting: Evaluating performance at individual management levels.

Class Timeline

• Chapter 10 Content: Covered flexible budgets, variance reports, and responsibility accounting

• Homework Reminder: Chapter 9 homework due tonight.

• Next Week Calendar:

  • Monday: Reg. school day. Office hours open.

  • Tuesday: Veterans Day holiday (no class, no office hours)

  • Wednesday: Lab review session at 4:30 PM (instead of 4 PM)

  • Lab Quiz Due: Next Thursday night, with extra day for preparation.

  • Wiley Chapter Quiz: Extended deadline to the following Tuesday (18th).

Understanding BUDGETS

• Static vs. Flexible Budgets:

  • Static Budget: Set at a fixed activity level (e.g., 10,000 units).

  • Flexible Budget: Adjusts for actual activity (e.g., adjusting from 10,000 to 12,000 units).

  • Note: Fixed costs do not flex; they remain constant regardless of the production level.

• Calculating Variance:

  • Use flexible budget based on actual production level to see differences between what was spent and what should have been spent.

  • Example Calculation: For 10,000 units with costs allocated, but actual production at 12,000, calculate new budgeted variable costs for 12,000 units.

BUDGET & ACTUAL REPORT EXAMPLES

• Budgeted Variable Cost Calculation:

  • For example, if total variable costs for 10,000 units equals $250,000, then per unit variable cost is:

  • $rac{250000}{10000} = 25$

  • For 12,000 units:

  • Total variable costs would be: $25*12000 = 300000$

• Variance Analysis:

  • Compare actual spending to budgeted based on the same production level.

  • E.g., assess if spending less results in positive variances or overspending indicates negative variances.

RESPONSIBILITY ACCOUNTING

• Definition: Assessing manager performance based on controllable costs. Focuses on responsibility centers to match evaluations with managerial authority:

  • Cost Centers: Managers accountable only for costs (e.g., production managers).

  • Profit Centers: Managers accountable for revenues and costs (e.g., product line managers).

  • Investment Centers: Highest authority, managers accountable for revenues, costs, and returns on investment.

• Controllable Costs: Direct costs managed by the manager (e.g., direct labor/materials). Non-controllable costs monitored but not managed (allocated costs) from higher management.

• Management by Exception: Focus on significant variances (material thresholds) that should be investigated.

CASE EXAMPLES IN RESPONSIBILITY ACCOUNTING

• Ford Example:

  • Cost Center Manager (F-150 Production): Responsible only for costs, no direct control over revenues/sales.

  • Profit Center Manager (F-150 Product Line): Manages both revenues (sales) and costs.

  • Investment Center Manager: Oversees profitability and is responsible for asset investment decisions.

PERFORMANCE EVALUATION TOOLS

• Responsibility Reports and Variances: Presented in a Budget to Actual report format highlighting controllable costs. Focus on costs under manager control to evaluate performance.

• Calculating ROI for Investment Centers:

  • Formula: $ROI = rac{ ext{Controllable Margin}}{ ext{Average Operating Assets}}$

  • Increased controllable margin and reduced average operating assets improve ROI metrics.

  • Practical evaluation based on CONTROLLABLE MARGIN versus AVERAGE OPERATING ASSETS to measure effectiveness and profitability.

CALCULATING AND IMPROVING ROI

• Strategies to Enhance ROI:

  1. Increase Controllable Margin:

  • Options include increasing sales or reducing costs (10% cut in costs can significantly improve ROI).

  1. Decrease Average Operating Assets:

  • Improve productivity by reducing unnecessary assets (e.g., cutting excess inventory).

    • Other scenarios observed would consider if variable costs change accordingly due to sales increases.

Overall, these elements provide a framework not just for academic understanding but for real-world applications in business management and performance evaluations. Efficient use of budgets and responsibility accounting can help improve operational efficiency and managerial performance across various organizational levels.