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UGA ACCT 2102 - Performance Evaluation, Part III (Chapter 10)
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ACCT 2102 1st Edition Lecture 30 Outline of Last LectureI. Performance Report ExampleII. Flexible vs. Static BudgetsIII. Flexible Budget ReportOutline of Current Lecture:IV. Review V. Segmented Income StatementVI. ROI and RIVII. ROI and RI ExampleCurrent 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 seeProfit: responsible for revenues and expenses (costs)Investment: responsible for investing assetsFlexible budget variance = flexible – actualMaster budget variance = master – actualVolume Variance = flexible – masterAnswering Last Question:Actual ResultsFlexible Budget VarianceFlexible BudgetVolume VarianceMaster BudgetOutput 6 ------- 6 1 5Sales Revenue $102,000(108K – 102K) = 6,000 U$108,000(108K – 90K) = 18,000 F$90,000These 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$50,000Fixed Expenses $21,000(21K – 25K) = 4,000 F$25,000 0 $25,000Volume variance “output = 1”  sold one more than expectedVolume 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 thresholdo > 5,000 = Favorable (material)o < 5,000 = UnfavorableV. Profit Centers . . . Segmented Income StatementJudge a segment based on segment margin.Sales RevenueLess: Variable CostsContribution MarginLess: 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 aboutSporting 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 RunUnits Sold 20,000 10,000Unit Sales Price $30 $45Contribution Margin Percentage 40% 50%Direct Fixed Costs $250,000 $100,000Common Fixed Costs $100,000 $50,0001. Calculate the margin on which the performance of each segment should be judged.Line Drive Home RunCM 600,000*40% = 240,000 450,000*60% = 225,000<Traceable FC> <250,000> <100,000> Segment Margin <10,000> 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 periodsROI = sales margin x capital/investment turnovero Op y = op y * SR Capital SR capital- Capital could also be called assets/net assetso 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 aboveand 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 goodRI = Operating Income – (Target Rate of Return x Total Assets)VII. ROI and RI . . . exampleChocolate 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 PeanutOperating Income $161,000 $43,000Sales Revenue $1,423,000 $578,000Total Assets $1,396,000 $360,000• Compute and interpret the ROI for each division.y = y * SR assets SR assetsROI Plain = 161,000 * 1,423,000 1,423,000 1,396,00011.5% = 11% * 1.02 (ROI = SM * turnover ratio)ROI peanut = 43,000 * 578,000 578,000 360,00011.9% = 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%) = –188,000RI peanut = 43,000 – (360,000*25%) = –47,000ROI < companies hurdle = negative


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UGA ACCT 2102 - Performance Evaluation, Part III (Chapter 10)

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