Chapter 10 Decentralization 04 29 2014 Splitting operations into different operating segments Performance evaluation systems Provide upper management with feedback o Clearly communicate expectations o Motivate segment managers Responsibility Accounting Responsibility Center o part of an organization whose manager is accountable for planning and controlling activities Responsibility accounting o System for evaluating performance of each responsibility center and its manager Types of responsibility centers Cost center o Costs only Revenue Center sales operation Profit center o Both revenues and costs o Local dominos Hampton Inn Investment center o Primarily revenues could be responsible for costs of their own o Investments revenues and costs o Treated almost as if they were stand alone companies Chapter 11 standard costing 04 29 2014 Standard Cost A budget for a single unit of product Benchmark for evaluating actual costs Types of standards Ideal o Do not allow for inefficiencies Practical o Allow for normal amounts of waste and inefficiency o Estimated usage waste rejects o This is being practical is you think about that stuff DM DL o Wage rate per hour p r taxes and benefits Information used to develop and update standards Past usage of materials and labor Current cost of inputs Future changes Computing standard costs Compute for o Direct material o Direct labor o Moh Standard Cost Calculations REMEMBER DM estimated usage waste rejects Dl wage rate hour Standard calculations continued Standard cost of producing One Unit of Product the total is the cost of producing one unit E11 15A pg 689 Direct Material Variances Price and quantity Compromised Direct materials price variance Direct materials quantity variance DM price variance How muc total variance is due to paying a higher lower price then expected for the DM purchased Formula AQP actual quantity purchased DM quantity Variance How much of the total variance is due to using a larger smaller quantity of DM than expected Impacted by a worker dropping raw materials and they must be discarded Standard cost of input Quantity standard Price standard E11 16A pg 689 Compare actual and standard Since you spent less money that will increase operating income which is favorable this will decrease operating income so it is unfavorable this can result in waste of production process Direct Labor Variances Comprised of o Direct labor rate variance o Direct labor efficiency variance o DL rate variance E11 18a pg 689 pay more for better works but there is more efficiency Summary of DM and Dl Variances Advantages of standard costing Cost benchmarks Usefulness in budgeting Motivation o Simplify bookkeeping Disadvantages o Outdated of inaccurate standards o Updated regularly o At least yearly o Lack of timeliness variances o Lean thinking current standards are not good enough o Decrease in DL o Unintended behavioral consequences Variable Overhead Variances Variable overhead rate variance Variable overhead spending variance AH AR SR Ah actual hours AR actual rate SR standard rate Variable overhead efficiency variance SR AH SHA SHA standard hours allowed Fixed overhead variance Actual fixed overhead budgeted fixed overhead Fixed overhead volume Variance Budgeted fixed overhead SHA SR E11 24A Need these two first Chapter 12 Capital investment decisions and the time value of money 04 29 2014 capital budgeting acquisition of assets used for a long period of time and which require large sums of money smuckers buying smulgers Four popular methods of capital budgeting analysis Cash Basis vs accrual basis Capital budgeting focuses on cash flows Cash flows Future cash revenue Any future savings in ongoing cash operating costs Future residual value of asset Investment cash inflows Capital budgeting process Identify potential investments Project the net cash inflows Analyze the investments o One or more of the four materials o Capital rationing Don t have unlimited funds o Post audit Crucial What went wrong Payback period Length of time it take to recover the cost investment E12 17A pg 761 payback does not support Equal Net Cash Flows this is not the greatest method payback period Unequal Net Cash Inflows find where 240 000 falls E12 18A 761 Payback Method Focuses only on time not profitability Time value of money ignored Shortest payback period is best only when all other factors are the same Formula for period payback can be used only with EQUAL inflow Accounting Rate of Return Focuses on the operating income not net cash inflow Unequal E12 19A pg 761 only difference is that you need to average out the cash flows Accountings rate of return Time Value of Money Factors Principal o Single lump sum Compound interest date Which Table to use Ignore future values Which Table to use could ear is 6 percent o Table A PV of 1 o Interest is calculated on the principal and on all interest earned to Table A PV of 1 741 pg o Single payment or cash inflow Table B PV of annuity 742 pg o Two or more payments equal ammounts You will be getting 200 000 dollars five years from Interest rate you E12 50B pg 769 Capital Rationing Decision E12 27A pg 763 Internal rate of return project Rate of return a company can expect to earn by investing in a The higher the IRR the more desirable the project The interest rate that will cause the present value to equal zero now you have to look at the 4 375 in the table at 8 Objective 5 it ignores everything after the pay back Accounting Rate of Return EXTENDED look at this formula Net present value method compare discounted cash inflows to their capital outlay required by the investment discount rate o hurdle rate or required rate of return o required minimum rate of return given riskiness of investment 04 29 2014