Volume Variance - arises only because the number of units actually sold differs from the original volume in the master budgetChapter 10 – Performance EvaluationPages 572–581, 593-59810.1Decentralization- Organizations split their operations into different operating segments- Top management delegates decision-making responsibility to the segment managers- Advantageso Frees top management’s timeo Use of expert knowledgeo Improves customer relationso Provides trainingABC Corp. CEOConsumer GoodsDivisionElectronicsDivisionApplianceDivisionTelevisionsCD PlayersDVD PlayersProductionSaleso Improves motivation and retention- Disadvantageso Duplication of costso Potential problems achieving goal congruence Goal congruence – when individual goals are in agreement with organizational goalPerformance Evaluation- Provide upper management with feedback- To be effective, shouldo Clearly communicate expectationso Provide benchmarks that promote goal congruence and coordination between segmentso Motivate segment managersResponsibility Accounting- Responsibility Centero part of an organization whose manger is accountable for planning and controlling activities- Responsibility Accounting o system for evaluating performance of each responsibility center and its manger.Responsibility CentersCost center - managers are accountable for costs only- production department, human resourcesdepartment, etc.- performance measured by comparing actual coststo budgeted costsRevenue center - managers are accountable primarily for revenues- sales territories- performance measured by comparing actual revenues to the budgetProfit center - managers are accountable for both revenues andcosts- chain of stores, restaurants, etc.- performance measured by comparing actual revenues,expenses, and profits to the budgetInvestment center - managers are responsible for 1) generating revenues, 2) controlling costs, and 3) efficiently managing the division’s assets- large division of a corporation- treated as if they were standalone companies10.2Performance Report- compares actual revenues and expenses to budgeted figures- Variance – difference between actual and budgeto Favorable variance: causes operating income to be higher than budgetedo Unfavorable variance: causes operating income to be lowerthan budgeted- Management by exceptiono Investigate variances1. What type of responsibility center is the subunit?2. Which items should be investigated if management investigates all variances exceeding $200,000 or 5%?3. Should only unfavorable variances be investigated? Explain.Segment Margin- Operating income generated by a profit or investment center beforesubtracting common allocated fixed costs- Controllable vs. Uncontrollable Varianceso Managers should only be held responsible for variance they can controlCaldrone Industries has entered the information for the most recent year for its pharmaceutical segment in the performance report below.Budgeted data for the same period was as follows:Budgeted sales in units 8,000Budgeted average selling price per unit $100Variable cost of goods sold per unit $25Variable operating expenses per unit $20Direct fixed Manufacturing Overhead $80,000Direct Fixed Operating Expenses 21,000Common Fixed Expenses Allocated to the Pharmaceutical Segment 18,000Complete the following report. Round percentages to the nearest hundredth.Performance ReportCaldrone Industries - Pharmaceutical SegmentFor Fiscal Year Ending December 31(all data is in millions)Actual Budgeted Variance Variance %Sales$880,000Less Variable Expenses:Variable Cost of Goods Sold204,000Variable Operating Expenses153,600 Contribution Margin522,400Less Direct Fixed Expenses: Fixed Manufacturing Overhead86,400Fixed Operating Expenses22,050 Segment Margin413,950Less Common Fixed Expenses19,080Operating Income$394,87010.4Static Budget - prepared for one level of sales volume - the master budget from Chapter 9 was staticVariance - difference between actual results and the budget- labeled as Favorable or UnfavorableFavorable - actual revenues > budgeted revenues- actual expenses < budgeted costsUnfavorable- actual revenues < budgeted revenues- actual expenses > budgeted expensesFlexible Budgets - summarized budgets prepared for different levels of volume- using the cost behavior identified in the static master budget- important when a company has significant variable expenseso volume increases total variable expenses increase.o Using a static budget would result in Unfavorable variable expense variances- Used to plan for future periods and to evaluate performance after the period has ended (control)Planning Using flexible budget for planning purposes:- Shows how revenues and expenses should vary as the number of products sold varies- Allows “what if” analysis- Must know cost behavior:o Total fixed costs will be the same regardless of volume as long as the volume is within the same relevant rangeo Total variable costs will change as volume changes. Performance EvaluationUse flexible budgets at the end of the period to - evaluate the company’s financial performance- help control costsCompare the actual results against the flexible budget for the actual volume Master Budget Variance – overall difference between Master budget and actual results Master Budget minus Actual Results Can be explained by the following:Volume Variance - arises only because the number of units actually sold differs from the original volume in the master budget Master Budget minus Flexible Budget Flexible Budget Variance- due to factors other than volume Flexible Budget minus Actual ResultsVariances should be expressed as ABSOLUTE numbers with:- F OR FAVORABLE- U FOR UNFAVORABLEActual Flexible Budget Master BudgetMain Street Muffins sell its muffins for an average price of $25 per case. The following is the budget information for this year:Budgeted sales in cases 8,000 casesPackaging costs per case $ 1Shipping expense per case $ 3Sales commission per case 2% of sales priceSalaries expense $6,200Office rent $3,500Depreciation $2,500Insurance $1,900Office supplies $900The company actual sold 8,300 cases resulting in total sales revenue of $215,400. Actual expenses were as follows:Packaging costs $ 8,700Shipping expense 25,900Sales commissions 4,308Salaries expense