ACCT 2102 1st Edition Lecture 30 Outline of Last Lecture I Performance Report Example II Flexible vs Static Budgets III Flexible Budget Report Outline of Current Lecture IV Review V Segmented Income Statement VI ROI and RI VII ROI and RI Example Current Lecture Performance Evaluation Part III Chapter 10 IV Review from last class and also finish last question from Flexible Budget Performance Report Review Cost contains performance report Variance Budget Actual Revenue rarely see Profit responsible for revenues and expenses costs Investment responsible for investing assets Flexible budget variance flexible actual Master budget variance master actual Volume Variance flexible master Answering Last Question Actual Results Flexible Budget Variance Flexible Budget Volume Variance Master Budget Output 6 6 1 5 Sales Revenue 102 000 108K 102K 6 000 U 108 000 108K 90K 18 000 F 90 000 These 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 Variable Expenses 57 000 57K 60K 3 000 F 60 000 60K 50K 10 000 U 50 000 Fixed Expenses 21 000 21K 25K 4 000 F 25 000 0 25 000 Volume variance output 1 sold one more than expected Volume variance for FC will always be 0 Complete the report and provide a reasonable explanation for variances greater than 5 000 o 5 000 materiality threshold o 5 000 Favorable material o 5 000 Unfavorable V Profit Centers Segmented Income Statement Judge a segment based on segment margin Sales Revenue Less Variable Costs Contribution Margin Less Traceable Fixed Costs Segment Margin Excludes Common Fixed Costs Recall CM and VC o CM CM SR Traceable avoidable direct fixed costs directly traces back to part of company you re talking about Sporting Heaven is a baseball bat manufacturer located in Athens Georgia Two products are produced in its manufacturing facility Line Drive and Home Run The following information relates to its first year of operations Line Drive Home Run Units Sold 20 000 10 000 Unit Sales Price 30 45 Contribution Margin Percentage 40 50 Direct Fixed Costs 250 000 100 000 Common Fixed Costs 100 000 50 000 1 Calculate the margin on which the performance of each segment should be judged CM Traceable FC Segment Margin Line Drive 600 000 40 240 000 250 000 10 000 Home Run 450 000 60 225 000 100 000 125 000 Judge segment on traceable fixed cost 2 How could this differ from the amount on which the manager should be judged Judge manager by controllable fixed cost On test Find operating income Total SM 125 000 10 000 115 000 Total Common FC 150 000 Operating income 35 000 VI Investment Centers ROI and RI Know how to interpret the numbers Return on Investment ROI measures the amount of income an investment center earns relative to the size of its assets Used to determine how to investment excess funds Used to compare a division s performance across periods ROI sales margin x capital investment turnover o Op y op y SR Capital SR capital Capital could also be called assets net assets o y y SR assets SR assets Increase margin or increase turnover to increase ROI Residual Income RI determines whether the division has created any excess income above and beyond management s expectations Leads to better goal congruence Specifically tells companies expectations based on returns ROI doesn t give expectations Divisions giving 12 when expecting 10 return you re doing good Divisions giving 5 when expecting 8 return you re not doing good RI Operating Income Target Rate of Return x Total Assets VII ROI and RI example Chocolate is My Weakness Inc a manufacturer of candy has two divisions Plain and Peanut The following data relate to operations for the period just ended Plain Peanut Operating Income 161 000 43 000 Sales Revenue 1 423 000 578 000 Total Assets 1 396 000 360 000 Compute and interpret the ROI for each division y y SR assets SR assets ROI Plain 161 000 1 423 000 1 423 000 1 396 000 11 5 11 1 02 ROI SM turnover ratio ROI peanut 43 000 578 000 578 000 360 000 11 9 7 4 1 61 ROI SM turnover ratio What does ROI SM turnover ratio represent ROI plain 11 5 for every 1 invested in plain you get back 11 5 in income 11 for every 1 of SR you get 11 back 1 02 for every 1 invested in plain you get 1 02 of SR ROI peanut 11 9 for every 1 invested in peanut you get back 11 9 in income 7 04 for every 1 of SR you get 7 4 back 1 61 for every 1 invested in peanut you get 1 61 of SR Peanut is doing better because it has the higher ROI Plain has the better Sales Margin Peanut is using assets more efficiently due to a higher turnover Assume the company has 10 000 in excess funds to invest in either Plain or Peanut In which division should the company invest Peanut due to higher ROI in which you get more for every 1 invested Assume the company s target rate of return is 25 hurdle rate Compute each division s RI RI operating income capital hurdle rate RI plain 161 000 1 396 000 25 188 000 RI peanut 43 000 360 000 25 47 000 ROI companies hurdle negative RI