ACCT 2102 1st Edition Lecture 28 Outline of Last LectureI. Operating Expenses Budget ContinuedII. Cash BudgetsOutline of Current Lecture:III. Decentralized OperationsIV. Responsibility CentersV. Performance ReportsCurrent Lecture: Performance Evaluation (Chapter 10)III. Decentralized OperationsEveryone is involved in the decision-making (similar to participative budgeting).Companies that decentralize split their operations into different operating segments• Advantages• Frees top management: focus on bigger problems• Encourages the use of expert knowledge• Improves customer relations: respond to customers quicker• Provides training: train lower level employees• Improves motivation and retention• Disadvantages• Duplicates costs• Problems achieving goal congruence: employees and company have same goalPerformance evaluation systems should . . . • Clearly communicate expectations• Provide benchmarks for operations• Motivate segment managersWays to decentralize:- Geography- Among product lines- Customer base: ex— one target market may be individuals and another may be companiesThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Responsibility: what you are in charge of IV. Performance Evaluation Systems . . . Responsibility Accounting*You can’t be more than one type—these are mutually exclusive.• Responsibility centers• Cost—only responsible for controlling cost• Compare actual costs to budgeted costs using performance reports• Ex: purchasing dept, distribution dept for magazine company• Revenue—only responsible for generating revenue• Compare actual revenue to budgeted revenue using performance reports• Profit—held responsible for generating revenue and controlling costs• Compare actual revenues, expenses, and profits to the budget using performance reports and segmented income statements• Ex: A store for a clothing company• Investment—the company itself is always an investment center• Determine if assets were used efficiently to generate profit using Return on Investment and Residual IncomeV. Performance Reports—BVA Reports (Budget vs. Actual)Compares actual revenue and expenses against budgeted revenue and expenses to calculate a variance • Favorable variance (F)• Cost = actual < budget• Revenue = actual > budget• Unfavorable variance (U)• Cost = actual > budget• Revenue = actual < budget• Analyze using management by exception• Used to determine which variances need an explanation• Calculate materiality threshold (given on test)o Use this number to determine when variances are material and therefore large enough to investigate Favorable is not always good, and unfavorable is not always bad.If you have an occurrence that falls within an acceptable range of outcome, it is immaterial (ignore it).If you have an occurrence that happens outside an acceptable range of outcomes, it is material (needs
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