Innovation in Retail Banking - The Asian Banker | The Asian Banker
12 - 1 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan,...
-
Upload
lizbeth-byrd -
Category
Documents
-
view
217 -
download
1
Transcript of 12 - 1 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan,...
12 - 1 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Responsibility Centers and Financial Control
Chapter 12
12 - 2 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Introduction
Georgia Tech University developed and maintained athletic programs to generate revenue, to attract top students, and to support alumni fund raising.
12 - 3 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Introduction
The early 1990s saw the costs of athletic programs at many universities spiraling out of control.
The tightening cost environment created a situation of desperation that called for the development and implementation of a system of financial control for varsity sports.
12 - 4 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Learning Objectives
1 Describe the form and nature of variance analysis and apply its basic insights.
2 Show why organizations use responsibility centers.
3 Recognize the common forms of responsibility centers.
4 Identify the issues to consider and basic tools to use in assessing the performance of a responsibility center.
12 - 5 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Learning Objectives
5 Assess the issues and problems created by revenue and cost interactions in evaluating the performance of an organization unit.
6 Identify the transfer-pricing alternatives available to organizations and the criteria for choosing a transfer pricing alternative.
7 Use return on investment and economic value added as financial control tools.
8 Identify the limitations of financial controls.
12 - 6 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Learning Objective 1
Describe the form and nature of variance analysis and apply its basic insights.
12 - 7 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Variances What are variances? Variances are differences between actual
and estimated costs. Variance analysis is a necessary step to
understand why a difference occurred.
12 - 8 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
First-Level Variances
The first-level variance for a cost item is the difference between the actual and master budget costs.
Variances are “favorable” if the actual costs are less than estimated costs.
Variances are “unfavorable” if the actual costs exceeds estimated costs.
12 - 9 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
First-Level VariancesCanning Cellular Services (000)
Master ActualBudget Costs Difference
Direct Material – Welcome Package 25,000 29,700 4,700
Direct Labor – Sales Staff 12,500 14,850 2,350 – Technical Staff 10,000 10,890 890
Support Cost – Data Processing 3,000 3,960 960 – System Activation 45,000 42,900 – 2,100
Total Customer-Related Costs 95,500 102,300 6,800
12 - 10 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decomposing Variances
What are flexible budgets? Flexible budgets recast cost targets in the
planned or master budget to reflect the actual level of production.
This allows comparisons of actual results to targets based on the achieved level of production.
12 - 11 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decomposing Variances
What are planning variances? They reflect the effect of the volume
change between the master budget and actual activity level achieved.
What are flexible budget variances? They show the differences between the
flexible budget and the actual results.
12 - 12 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decomposing Variances
Master Budget– Flexible Budget
= Planning Variance
Flexible Budget– Actual Results
= Flexible Budget Variance
Planning variances and flexible budgetvariances are called secondary variances.
12 - 13 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decomposing Variances
What is the direct material efficiency or usage variance?
It is actual quantity used at target or standard price less the flexible budget allowance at the planned or target price.
Usage Variance = (AQ – SQ) × SP What is the direct material price variance? Price Variance = (AP – SP) × AQ
12 - 14 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decomposing Variances
What is the efficiency or usage variance for direct labor costs?
Efficiency Variance = (AH – SH) × SR What is the rate variance for direct labor
costs? Rate Variance = (AR – SR) × AH Support costs can also be analyzed in detail.
12 - 15 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decomposing Variances
Support costs can reflect flexible or capacity-related costs.
The quantity of capacity-related costs may not change from period to period, but the spending on them may fluctuate.
What are flexible support costs? They reflect operations that are proportional
to the volume of activity.
12 - 16 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decomposing Variances
Master Planning FlexibleBudget Variance Budget
Direct Material – Welcome Package 25,000 2,500 27,500
Direct Labor – Sales Staff 12,500 1,250 13,750 – Technical Staff 10,000 1,000 11,000
Support Cost – Data Processing 3,000 300 3,300 – System Activation 45,000 4,500 49,500
Total Customer-Related Costs 95,500 9,550 105,050
Canning Cellular Services (000)
12 - 17 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decomposing Variances
Flexible Actual Budget Variance Results
Direct Material – Welcome Package 2,200 29,700
Direct Labor – Sales Staff 1,100 14,850 – Technical Staff – 110 10,890
Support Cost – Data Processing 660 3,960 – System Activation – 6,600 42,900
Total Customer-Related Costs – 2,750 102,300
Canning Cellular Services (000)
12 - 18 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decomposing Variances
The following information relates to Canning Cellular Service:
The actual number of new customers were 1,100,000.
Direct MaterialsSQ: 1 AQ: 1
SP: $25 AP: $27
Direct LaborSales Staff
SH: .50 AH: .45SR: $25 AR: $30
12 - 19 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decomposing Variances
Direct LaborTechnical Staff
SH: .25 AH: .22SR: $40 AR: $45
Support CostData ProcessingSH: .20 AH: .24SR: $15 AR: $15
Support CostSystem ActivationSH: .15 AH: .12
SR: $300 AR: $325
12 - 20 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decomposing Variances
Materials efficiency variance = 0 Materials price variance:
($25 SP – $27 AP) × 1,100,000 = $2,200,000 U
Flexible budget variance = $2,200,000 U Sales staff efficiency variance:
(550,000 SH – 495,000 AH) × $25 = $1,375,000 F
12 - 21 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decomposing Variances
Sales staff rate variance: ($25 SR – $30 AR) × 495,000 = $2,475,000 U
Flexible budget variance = $1,100,000 U Technical staff efficiency variance:
(275,000 SH – 242,000 AH ) × $40 = $1,320,000 F
12 - 22 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decomposing Variances
Technical staff rate variance: ($40 SR – $4 AR) × 242,000 = $1,210,000 U
Flexible budget variance = $110,000 F
Support cost data processing efficiency: variance (220,000 SH – 264,000 AH) × $15 = $660,000 U
Rate variance = 0 Flexible budget variance = $660,000 U
12 - 23 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decomposing Variances
Support cost system activation efficiency variance: (165,000 SH – 132,000 AH) × $300 = $9,900,000 F
Support cost system activation rate variance ($300 SR – $325 AR) × 132,000 = $3,300,000 U
Flexible budget variance = $6,600,000 F
12 - 24 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decomposing Variances
MasterBudget
FlexibleBudget
ActualResults
Planning Variance Flexible Budget Variance
Total Variance
12 - 25 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decomposing Variances
Usage Variance
Flexible Budget Variance
Actual Quantity× Standard Price
Standard Quantity× Standard Price
Actual Quantity× Actual Price
Price Variance
12 - 26 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decomposing Variances
Second Level VariancesPlanning variances
Flexible budget variances
First Level VariancesDifference between the actual
and master budget costs
Third Level VariancesUse and price variances
12 - 27 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Learning Objective 2
Show why organizations use responsibility centers.
12 - 28 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decentralization
What are centralized organizations? Organizations which reserve most of the
decision-making power for senior executives.
Centralization works effectively in organizations with stable environments.
12 - 29 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decentralization
What are decentralized organizations? Organizations which delegate a good deal
of the decision-making authority to lower-level managers.
Decentralized organizations are effective in environments requiring quick responses to change.
12 - 30 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decentralization
Three conditions are necessary for effective decentralization:
1 Employees must be given, and accept, the authority and responsibility to make decisions.
12 - 31 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Decentralization
2 Employees must have the training and skills they need to accept the decision making responsibility.
3 The organization must have a system in place that guides and coordinates the activities of decentralized decision makers.
12 - 32 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Controlling Operations
The major purpose of decentralization is to give decision makers the responsibility to make operating decisions.
This creates a need for operations control. What is the focus of operations control? It focuses on finding the best operating
decisions.
12 - 33 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Controlling Operations
What is the focus of financial control? It focuses on an overall assessment of how
well operations control is working to improve financial performance.
12 - 34 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Learning Objective 3
Recognize the common forms of responsibility centers.
12 - 35 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Responsibility Centers
What is a responsibility center? It is an organization unit for which a
manager is made responsible. The center’s manager and supervisor
establish specific and measurable goals for the responsibility center.
The goals should promote the long-term interest of the organization.
12 - 36 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Responsibility Centers
Responsibility centers are classified into four types:
1 Cost centers2 Revenue centers3 Profit centers4 Investment centers
12 - 37 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Responsibility Centers
What is a cost center? It is a responsibility center whose
employees control costs but do not control its revenues or investment level.
12 - 38 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Responsibility Centers
What is a revenue center? It is a responsibility center whose members
control revenues but do not control the cost of the product or service they sell or the level of investment in the responsibility center.
12 - 39 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Responsibility Centers
What is a profit center? It is a responsibility center whose manager
and other employees control both the revenues and the costs of the product or service they sell or deliver.
12 - 40 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Responsibility Centers
What is an investment center? It is a responsibility center whose manager
and other employees control the revenues, costs, and the level of investment in the responsibility center.
12 - 41 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Learning Objective 4
Identify the issues to consider and basic tools to use in
assessing the performance of a responsibility center.
12 - 42 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Evaluating Responsibility Centers
Underlying the accounting classifications of responsibility centers is the concept of controllability.
The controllability principle asserts that people should only be held accountable for results that they can control.
It is often difficult to apply the controllability principle.
12 - 43 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Evaluating Responsibility Centers
What are some problems associated with controllability?
– jointly earned revenues and/or jointly incurred costs
– intricate, and often arbitrary, accounting procedures
12 - 44 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Learning Objective 5
Assess the issues and problems created by revenue
and cost interactions in evaluating the performance
of an organization unit.
12 - 45 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Using Segment Margin Reports
What is a segment margin? It is the level of controllable profit reported
by an organizational unit or product line.
12 - 46 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Using Segment Margin Reports
Revenue $950,000 $1,250,000 $2,200,000Variable Costs 750,000 950,000 1,700,000Contribution Margin $200,000 $ 300,000 $ 500,000Other Costs 75,000 60,000 135,000Segment Margin $125,000 $ 240,000 $ 365,000Allocated Costs 70,000 80,000 150,000Income $ 55,000 $ 160,000 $ 215,000Unallocated Costs 300,000Organization Profit ($85,000)
New Car Sales
Used Car Sales Total
12 - 47 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Using Segment Margin Reports
What type of problem can occur when organizations evaluate responsibility centers as profit centers?
– identifying responsibility for the control of sales and costs
12 - 48 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Using Segment Margin Reports
Organizations use two different approaches to evaluate segment margin numbers:
1 Past performance Is performance this period reasonable, given
past experience?2 Comparable organizations How does performance compare to similar
organizations?
12 - 49 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Using Segment Margin Reports
What are some limitations of segment margin reporting?
1 Margins can be highly aggregated summaries.
2 Some segment reports contain arbitrary, or soft, numbers.
3 Revenue figures often reflect assumptions and allocations that can be misleading.
12 - 50 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Using Segment Margin Reports
Because of these limitations, interpreting segment margins should be done carefully.
Other critical success factors should be used as well to assess performance.
12 - 51 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Learning Objective 6
Identify the transfer-pricing alternatives available to
organizations and the criteria for choosing a transfer
pricing alternative.
12 - 52 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Transfer Pricing
What is transfer pricing? It is a set of tools and methods used to
attribute revenues earned by the organization to organization sub-units.
12 - 53 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Transfer Pricing
Transfer pricing can be very arbitrary, especially if there is a high degree of interaction among the responsibility centers.
12 - 54 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Transfer Pricing Interrelationships
Body Shop Department
Service Department
Leasing Department
Used Car Department New Car Department
New Car PreparationRepairs
RepairsNew Car
Preparation
Used Cars
Used Cars
Used Cars
12 - 55 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Approaches to Transfer Pricing
There are four approaches to transfer pricing:
– Market-Based– Cost-Based– Negotiated– Administered
12 - 56 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Approaches to Transfer Pricing
Market-Based Transfer Pricing
If a good external market existsfor the transferred product or service,
then market prices are the mostappropriate basis for pricing.
Unfortunately, these marketswith well-defined prices seldom exist.
12 - 57 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Approaches to Transfer Pricing
Cost-BasedTransfer Prices
Variable cost plus a markup
Full cost
Full cost plus a markup
12 - 58 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Approaches to Transfer Pricing
What are some concerns about cost-based transfer prices?
– Cost-based transfer prices do not provide the appropriate economic guidance when operations are capacity constrained.
– They do not focus on the intent of the system, which is to allow calculation of unit incomes.
12 - 59 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Approaches to Transfer Pricing
Economists argue that only marginal cost transfer prices are optimal.
If the transfer price is higher than the marginal cost…
– the supplying unit wants to sell more than the optimal quantity, and
– the purchasing unit wants to buy fewer than the optimal quantity.
12 - 60 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Approaches to Transfer Pricing
NegotiatedTransfer Prices
Supplying and receiving responsibilitycenters negotiate prices.
Prices reflect both negotiating skillsand economic considerations.Optimal transfer price is the
the net realizable value of the last unitsupplied for all units supplied.
12 - 61 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Approaches to Transfer Pricing
NegotiatedTransfer Prices
Reflect the accountability and controllabilityprinciples underlying responsibility centers
Can easily lead to decisions thatdo not provide the greatest economic benefits
12 - 62 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Approaches to Transfer Pricing
AdministeredTransfer Prices
Prices set by a rule, policy, or an arbitrator
Easy to administer
Arbitrary
Tend to violate the spirit ofthe responsibility approach
12 - 63 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Learning Objective 7
Use return on investment and economic value added
as financial control tools.
12 - 64 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Efficiency and Productivity Elements of ROI
ROI = Operating Income ÷ Investment
ROI = Operating Income × Sales Sales Investment
ROI = Return on Sales × Asset Turnover = Efficiency × Productivity
12 - 65 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Efficiency and Productivity Elements of ROI
What is efficiency? It is a measure of an organization’s ability
to control costs.
Operations Efficiency = Standard Cost Actual Cost
12 - 66 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Efficiency and Productivity Elements of ROI
What is productivity? It is a ratio of output to input. In financial control, this is the ratio of sales
to investment.
12 - 67 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Assessing Return on Investment
Analyze trends. Compare to competitors. Decompose and compare to competitors. Look for signals suggesting where there
might be problems.
12 - 68 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Using Economic Value Added
What is economic value added? It is an investment criterion, previously
called residual income.
Economic Value Added = Income – Cost of Capital
12 - 69 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Using Economic Value Added
EVA evaluates income relative to the level of investment required to earn that income.
It motivates managers to do what they think is necessary to make economic value added as large as possible.
12 - 70 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Learning Objective 8
Identify the limitations of financial controls.
12 - 71 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
The Efficacy of Financial Control
What are some criticisms of financial control?
Information is delayed. Information is highly aggregated. Its measures are narrow and do not evaluate
how well the organization is doing in meeting stakeholders’ requirements.
It is too focused on short-term results.
12 - 72 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
The Efficacy of Financial Control
How should we interpret these facets of financial control?
Financial control is an important tool in the process of control.
Used properly, it provides crucial help in assessing the organization’s long-term viability and identifying processes that need improvement.
12 - 73 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Conclusion
Georgia Tech implemented a Responsibility Approach Center (RAC), which focuses on computing a cost per sport.
The analysis revealed that all sports, with the exception of basketball, were a net drain on the University’s resources.
12 - 74 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
End of Chapter 12