Acc7 Perf Measures
Acc7 Perf Measures
Acc7 Perf Measures
A cost center is a responsibility center whose employees control costs but do not control
its revenues or investment level.
A revenue center is a responsibility center whose employees control revenues but do not
control costs or the level of investment. Revenue center employees can control the mix of
items carried in their stores, prices of products and promotional activities. Revenue center
managers are often at the mercy of others who determine the costs of their goods (e.g., a
service station manager has no control over the cost of the gas sold).
A profit center is a responsibility center whose employees control revenues and costs but
not the level of investment; the level of investment is usually controlled by senior
management. Most outlets of fast food restaurant chains and motel chains are profit
centers.
Segment margins can represent highly aggregated summaries of each organizational units
performance. Thus, other critical success factors should be used as well to assess
performance.
Some segment reports contain arbitrary numbers. Accountants call these soft numbers
since they rest on subjective assumptions over which there can be legitimate
disagreement.
The revenue figures often reflect assumptions and allocations that can be misleading.
These assumptions relate to how the revenues that the organization earned are divided
among the responsibility centers.
Transfer Pricing A transfer price is the price paid for goods or services transferred within an
organization. Transfer prices facilitate the attribution of revenues earned by the organization to
organizational sub-units. Transfer pricing can be very arbitrary, especially if there is a high degree
of interaction among the various responsibility centers. There are four broad approaches to
transfer pricing:
Market-Based Transfer Prices. Market prices provide an independent valuation of products that
are transferred between divisions, and reflect jointly earned revenue in a manner that reflects
the markets assessment. One difficulty is that clear market prices often do not exist for
many products.
Cost-Based Transfer Prices. If goods or services do not have market prices, transfer prices are
often based on cost. Common cost basis methods include variable cost plus a markup, full
cost, and full cost plus a markup.
Negotiated Transfer Prices. When market prices do not exist, another possibility is to allow
divisions to negotiate transfer prices. Critics argue that negotiated transfer prices reflect both
negotiating skills as well as economic considerations, and therefore lead to less valid as indices
of economic performance.
Administered Transfer Prices. Administered transfer prices are set by an arbitrator or by a rule
or policy. Some find them appealing because they are easy to administer. An example is to use
the variable cost of a product plus 25%. Others view these types of prices as unappealing
because they are quite arbitrary.
Return on Investment and Economic Value Added
ROI = return on sales x asset turnover
Return on sales = operating income/sales
Return on sales is a measure of operating efficiency. On return on sales, efficiency is a
measure of an organizations ability to control costs.
Asset turnover = sales/investment
Asset turnover is a measure of productivity. Productivity is a ratio of output to input.
Assessing Return on Investment
Decompose ROI into its efficiency and productivity measures and compare to those of other
organizations.
Economic Value Added
Economic value analysis evaluates an organization segments (for example, a division, product
line, or product) financial desirability using the segments income less a financial charge that is
computed by multiplying the organizations cost of capital by the investment in the segment.
Economic value added is used primarily to encourage managers to improve the relationship
between return and assets employed. This can be done by making assets more efficient or using
assets more effectively.
EXERCISES
E-1. For each of the following measures, identify which perspective of the balanced scorecard it
represents: financial, customer, internal-business-process, or learning-and growth.
1.
2.
3.
4.
5.
6.
7.
9.
10.
E-2. Match the following critical success factors with the appropriate perspective of the balanced
scorecard. Use the following key: F = Financial, C = Customer, IB = Internal business, and LG =
Learning and growth.
a. the efficient and effective use of employees
b.
c.
d.
e.
f.
g.
h.
E-3. Balanced scorecards contain a number of factors that are important to the success of a business.
These factors are often divided into four categories: financial, customer, learning and growth, and
internal operations.
Consider the twelve factors that follow.
1. Market share
2. Earnings per share
3. Manufacturing cycle efficiency
4. Machine downtime
5. Number of patents held
6. Employee suggestions
7. Number of repeat sales
8. Levels of inventories held
9. Number of vendors used
10. Cash flow from operations
11. Employee training hours
12. Gross margin
Required:
Determine the proper classification (financial, customer, learning and growth, or internal
operations) for each of the twelve factors listed.
E-4. Amber Products Inc. has two product lines: A-1 and A-2. Revenue and cost information for each
of the product lines for 2012 are as follows:
A-1
A-2
Selling price per unit
P60
P45
Variable costs per unit
25
15
Traceable fixed expenses
P40,000
P30,000
In 2012, Amber had common fixed expenses of P50,000, and the company produced and sold 4,000
units of A-1 and 6,000 units of A-2.
Prepare a segmented income statement with a column for each product line and the total company.
E-5. The following data refer to the AIM division of Master Company.
Average selling price
P100
Average variable cost
40
Total fixed costs
P2,000,000
Average investment
P5,000,000
1. How many units must AIM sell to earn an 18% ROI?
2. If the division sells 60,000 units, what will ROI be?
3. The minimum desired ROI is 14%. At the sales volume of 55,000 units, what is RI?
4. The manager desires a 22% ROI and wishes to sell 50,000 units. What selling must the
division charge?
5. Using the original information, if the minimum ROI is 20% and RI is P300,000, what are sales in
units?
E-6. Maxim Products has a division that generated P10,000,000 in sales and operating income of
P1,700,000 on average operating assets of P6,000,000. The company's management team
expects division managers to generate sufficient income to guarantee a minimum return of 30
percent.
1.
2.
E-7. Fun Treats Inc. sell a variety of drink and food products including juice and ice cream. The
segmented income statements for these two products are as follows:
Juice
Ice Cream
Sales
P500,000 P600,000
Variable expenses
200,000
300,000
Contribution margin
Traceable fixed expense
Segment margin
300,000
100,000
P200,000
300,000
100,000
P200,000
The company's management is considering a special advertising campaign that will run on a Saturday
morning when many children are watching television. The advertising campaign is expected to cost
P25,000 and only one product can be featured. In-house marketing studies show that the campaign
could increase sales of the juice division by P100,000 or increase sales of the ice cream division by
P100,000.
The marketing supervisor has decided that since both products have the same segment margin, the
company will be equally as well off regardless of which product is featured.
1.
2.
Do you agree or disagree with the marketing supervisor? Why or why not.
Which product do you feel should be featured? Show calculations to support your answer.
E-8. The Carpet Division of Home Products Corporation manufactures a single grade of residential
grade carpeting. The division has the capacity to produce 500,000 square yards of carpet each
year. Its current costs and revenues are shown here:
Sales (400,000 square yards)
P2,000,000
Variable costs per square yard:
Production
P2.00
SG&A
1.00
Fixed costs per square yard (based
on 500,000 yard capacity)
Production
P0.50
SG&A
1.00
The Housing Division currently purchases 40,000 yards of carpeting (of the grade produced by the
Carpet Division) each year at a cost of P6.50 per square yard from an outside vendor.
1.
2.
If the autonomous Housing and Carpet Divisions enter negotiations on the internal transfer of
40,000 square yards of carpeting, what is the maximum price that will be considered?
If the autonomous Housing and Carpet Divisions enter negotiations on the internal transfer of
40,000 square yards of carpeting, what is the Carpet Division's minimum price?
3.
If the Housing and Carpet Divisions agree on the internal transfer of 40,000 square yards of
carpet at a price of P4.50 per square yard, how will the profits of the Housing Division be
affected?
4.
If the Housing and Carpet Divisions agree on the internal transfer of 40,000 square yards of
carpet at a price of P4.00 per square yard, how will overall corporate profits be affected?
5.
Assume, for this question only, that the Carpet Division is producing and selling 500,000
square yards of carpet to external buyers at a price of P5 per square yard. What would be the
effect on overall corporate profits if Carpet Division reduces external sales of carpet by 40,000
square yards and transfers the 40,000 square yards of carpet to the Housing Division?
E-9. Seiko Companys Audio Division produces a speaker that is widely used by manufacturers of
various audio products. Sales and cost data on the speaker follow:
Selling price per unit on the intermediate market
P60
Variable cost per unit
42
Fixed costs per unit
8
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Capacity in units
25,000
Seiko Company has just organized a Hi-Fi Division that could use this speaker in one of its products.
The Hi-Fi Division will need 5,000 speakers per year. It has received a quote of P57 per speaker from
another manufacturer. Seiko Company evaluates divisional managers on the basis of divisional profits.
A. Assume that the Audio Divison is now selling only 20,000 speakers per year to outside
customers on the intermediate market.
1. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for
speakers sold to the Hi-Fi Division?
2. From the standpoint fo the Hi-Fi Division, what is the highest acceptable transfer price for
speakers purchased from the the Audio Division?
B.
3. If left free to negotiate without interference, would you expect the division managers to
voluntarily agree to the transfer of 5,000 speakers from the Audio Divison to the Hi-Fi
Division? Why or why not?
4. From the standpoint of the entire company, should the transfer take place? Why or why
not?
Assume that the Audio Division is selling all of the speakers it can produce to outside
customers on the intermediate market.
1. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for
speakers sold to the Hi-Fi Division?
2. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for
speakers purchased from the Audio Division?
3. If left free to negotiate without interference, would you expect the division managers to
voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi
Division? Why or why not?
4. From the standpoint of the entire company, should the transfer take place? Why or why
not?
MULTIPLE CHOICE
1.
Which of these is the perspective of the balanced scorecard that is at the top of a nonprofit
organizations mission statement?
a. financial perspective.
b. internal business and production process perspective.
c. learning and growth perspective.
d. customer perspective.
2.
Which of these is the perspective of the balanced scorecard that indicates whether the companys
strategy and operations add value to shareholders?
a. financial perspective.
b. internal business and production process perspective.
c. learning and growth perspective.
d. customer perspective.
3.
Which of these is the perspective of the balanced scorecard that is at the top of the list for a
companys lenders and shareholders?
a. financial perspective.
b. internal business and production process perspective.
c. learning and growth perspective.
d. customer perspective.
4.
Assume an organizations cost of capital is 10% and Division X has operating income of P1.5
million and uses P10 million of capital. The economic value added for Division X is:
a. P100,000
b. P150,000
c. P500,000
d. P850,000
5. The return on investment is usually considered the most popular approach to incorporating the
investment base into a performance measure because
a. it blends all the ingredients of profitability into a single percentage.
b. once determined, there is no need to use it with other measures of performance.
c. it is similar to the company's price earnings ratio in that a corporation's return on investment
appears every day in The Wall Street Journal.
d. of both (a) and (c).
6.
7.
Identify the BEST description of the balanced scorecards financial perspective. To achieve our
firms vision and strategy,
a. how can we obtain greater profits for the current year?
b. how can we increase shareholder value?
c. how will we obtain continuous improvements?
d. how can we secure greater customer satisfaction?
8.
Identify the BEST description of the balanced scorecards internal business processes perspective.
To achieve our firms vision and strategy,
a. how do we lower costs?
b. how do we motivate employees?
c. how can we obtain greater profits?
d. what processes will increase value to customers?
9. Residual income is a better measure for performance evaluation of an investment center manager
than return on investment because
a.
b.
c.
d.
The problems associated with measuring the asset base are eliminated.
Desirable investment decisions will not be neglected by high return divisions.
Only the gross book value of assets needs to be calculated.
Returns do not increase as assets are depreciated.
10. The optimal transfer price from the viewpoint of the corporation is
a. variable cost
c. variable cost plus opportunity cost
b. absorption cost plus markup
d. absorption cost plus selling expenses
11.
In a decentralized company in which divisions may buy goods from one another, the transferpricing system should be designed primarily to
a. Aid in the appraisal and motivation of managerial performance.
b. Increase in the consolidated value of inventory.
c. Allow division managers to buy from outsiders.
d. Minimize the degree of autonomy of division managers.
its suburban
P150,000
P250,000
P110,000
P200,000
P100,000
P130,000
P950,000
is:
15. The First Division of Furrow Company produces Part 1 that is used by OENs as a key part in their
products. Costs and sales data of Part 1 are as follows:
Selling price per unit
P100
Variable cost per unit
60
Fixed cost per unit (Based on 40,000 units capacity per annum)
24
Furrow Companys Second Division is introducing a new product that will use Part 1. An outside
supplier has quoted Second Division a price of P96 per unit. This represents the usual P100 price
less a quantity discount due to the large number of Second Divisions requirement.
If the Second Division would buy 15,000 units of Part 1 from the First Division, the effect on the
corporate profits would be
a. Increase by P240,000.
c. Increase by P210,000.
b. Increase by P1,500,000.
d. Reduce by P60,000.
16. Division A of Harkin Company has the capacity for making 3,000 motors per month and regularly
sells 1,950 motors each month to outside customers at a contribution margin of P62 per motor.
Division B of Harkin Company would like to obtain 1,400 motors each month from Division A.
What should be the lowest acceptable transfer price from the perspective of Division A?
a. P26.57
c. P35.70
b. P15.50
d. P62.00