D

Operational Performance Measurement Notes

Learning Objectives

  • Control Systems

    • Explain general control systems and specifically operational control systems, focusing on how they manage organizational activities to achieve goals.

  • Master Budget Variance

    • Define and interpret the master budget variance for a specific period.

  • Variance Framework

    • Develop a framework for dissecting the master budget variance into its components.

  • Standard Costs

    • Create standard costs for product costing, performance evaluation, and control.

  • Manufacturing Cost Flows

    • Record the flow of manufacturing costs and their variances within a standard cost system.

  • Operating Functions & Nonfinancial Indicators

    • Discuss the main operating functions and the importance of using nonfinancial performance indicators.

Management Accounting and Control Systems

  • Control Definition

    • A collection of procedures, tools, and systems that organizations use to monitor activities toward achieving their goals.

  • Management Accounting & Control System

    • The organization’s primary performance measurement framework.

Operational Control

  • Operational Control Focus

    • Targets short-term operational performance and relates to monitoring basic business processes.

  • Short-Term Financial Control

    • Involves comparing actual financial results to the budgeted amounts.

  • Variances

    • These are discrepancies between budgeted figures (e.g., budgeted operating income) and actual financial outcomes.

Developing an Operational Control System

  • Steps
    • Identify strategic issues.
    • Explore alternative actions.
    • Gather information and analyze options.
    • Implement chosen strategies.
    • Continuously evaluate effectiveness.

Analysis of Operating Income (Schmidt Machinery Company)

  • Operational Income Overview for October 2022

    • Actual Operating Income: $128,000
    • Master Budget Income: $200,000
    • Variance: $72,000 Unfavorable (U)

  • Detailed Breakdown

    1. Sales
    • Actual: $639,600
    • Budgeted: $800,000
    • Variance: $160,400U
    1. Variable Costs
    • Actual: $350,950
    • Budgeted: $450,000
    • Variance: $99,050F
    1. Contribution Margin
    • Actual: $288,650 (45%)
    • Budgeted: $350,000 (44%)
    • Variance: $61,350U
    1. Fixed Costs
    • Actual: $160,650 (25%)
    • Budgeted: $150,000 (19%)
    • Variance: $10,650U

Variance Analysis

  • Master Budget Variance

    • Formula:
      ext{Master Budget Variance} = ext{Master Budget Operating Income} - ext{Actual Operating Income}
    • Calculation: $200,000 - 128,000 = 72,000U$

  • Flexible Budget Variance

    • Components:
      • Flexible budget variance: $5,000F
      • Sales volume variance: $77,000U

Flexible Budget Analysis

  • Flexible Budget Preparation
    • Created post-period to match actual sales volume with budgeted costs.

Breakdown of Master Budget Variance:

  • Key factors causing the variance:
    • Differing actual sales volume.
    • Deviations in actual variable costs per unit.
    • Actual total fixed costs exceeding budgeted costs.
    • Variation in actual selling price per unit compared to planned price.

Direct Materials and Labor Variances

  • Direct Material (DM) Standard Cost Variance Example

    • Material Standard:
      • 1.5 pounds per unit at $4.00/pound.
    • Volumes: 1,700 pounds purchased and used for 1,000 units.

  • Calculating Actual Price:
    ext{AP} = rac{ ext{Total Cost}}{ ext{Actual Quantity}} = rac{6,630}{1,700} = 3.90/lb

  • Material Price Variance (PV)

    • Calculated as:
      PV = ext{Actual Sales} - ext{Flexible Budget Sales} = 639,600 - 624,000 = 15,600F

  • Material Usage Variance (UV)

    • Based on the difference between the standard quantity and actual amount used.

Causes of Variances

  • DM Price Variances
    • Differences in material grade, quantity discounts, or expedited shipping costs.
  • Usage Variances
    • Non-standard materials or inefficiencies in labor.

Standard Costs Overview

  • Definitions

    • Standard Costs: Costs expected under optimal conditions.
    • Standard Cost System: An accounting approach using standard costs.

  • Types of Standards

    • Ideal Standards: Perfect conditions.
    • Continuous Improvement Standards: Adjust over time.
    • Attainable Standards: Realistic expectations.

Nonfinancial Performance Indicators

  • Importance

    • Provide insight into business processes beyond mere financial outcomes.

  • Examples

    • Customer Response Time (CRT): Measure of delivery efficiency.
    • Manufacturing Cycle Efficiency (MCE): Ratio of value-added processing time.

Chapter Summary

  • Control Systems

    • Defined concepts like operational control, master budget variances, and the importance of flexible budgets.

  • Breakdown Variances

    • Varied income calculation through flexible training to enhance financial control.

  • Nonfinancial Indicators

    • Offer best practices for evaluating processes without strict reliance on short-term financial results.