Accounting Rate of Return measures average annual rate of return over asset s life shows effect of the investment on the company s accrual based income used to screen potential investments from those that are less desirable Balanced Scoreboard Management must consider both financial and operational performance measures Budget plan that covers a specific period of time helps management determine how best to use resources both materials and manpower strategy is to make money Budgeted Balance Sheet forecasts the company s position at the end of the budget Budgetary Slack when a manager intentionally overbudgets expenses or underbudgets revenue Capital Budgeting process of making capital investment decisions focuses on cash flows 4 methods quick easy Payback Period Accounting Rate of Return ARR difficult to calculate Net Present Value NPV Internal Rate of Return IRR Capital Budgeting Process Identify potential capital investments Estimate future net cash inflows Analyze potential investments Engage in capital rationing if necessary to choose among alternative investments Perform post audits after making capital investments Capital Expenditure Budget reflects the company s plan for purchasing property plant and equipment Capital Rationing managers determine if and when to make specific capital investments Capital Turnover how efficiently the division uses its assets to generate sales revenue Cash Budget Project cash that will be available to run the company s operations and determines whether the company will have extra funds to invest or whether the company will need to borrow cash Cash Inflows future cash revenue any future savings in ongoing cash operating costs any future residual value of the asset Common fixed Expenses fixed expenses that cannot be traced to the profit center Compound interest means interest is calculated on the principal and on all interest earned to date interest assumes that all interest earned will remain invested at the same interest rate not withdrawn and spent Decentralization Splitting operations into different operating segments Disadvantage duplication of costs Direct fixed Expenses fixed expenses that can be traced to the profit center Direct Labor Efficiency Variance tells managers how much of the total labor variance is due to using a greater or lesser amount of time than anticipated production supervisor Direct Labor Rate Variance tells managers how much the total labor variance is due to paying a higher lower hourly wage rate than anticipated human resources production supervisors Direct Labor Variances comprised of the direct labor rate variance and the director labor efficiency variance Direct Materials Price Variance tells managers how much total variance is due to paying higher lower price than expected for the DM it purchased Purchasing supervisor Direct Materials Quantity Variance tells managers how much of the total variance is due to using a larger smaller quantity of DM than expected Production supervisor Discounted Cash Flow Models Recognize time value of money Two methods Net present value NPV Internal rate of return IRR Financial Budgets Project collection payment of cash as well as forecast the company s budgeted balance sheet Fixed Overhead Budget Variance measures difference between actual fixed overhead costs incurred the budgeted fixed overhead costs Fixed Overhead Volume Variance difference between the budgeted fixed overhead and the standard fixed overhead cost allocated to production Flexible Budget budget prepared for a different level of volume than that which was originally anticipated Flexible Budget Variance is the difference between the flexible budget and actual results Ideal Standards standards based on perfect or ideal conditions do not allow for any poor quality raw materials waste in the production process machine breakdown or other inefficiencies Internal Rate of Return Rate of return a company can expect to earn by investing in a project interest rate will cause present value to equal zero higher the IRR the more desirable the project Key Performance Indicators KPIs included on balanced scorecard and help managers assess how well the company s objectives are being met Master Budget set of budgeted financial statements and supporting schedules for the entire organization all of the supporting budgets needed to create company s operating and financial budgets Lag Indicators Reveal the results of past actions and decisions Lead indicators Predict future performance Master Budget Variance Difference between the actual revenues and expenses and the master budget Apples to oranges comparison Management by Exception means managers will only investigate budget variances that are relatively large Net Present Value Compare discounted cash inflows to their capital outlay required by the investment the difference between the present value of the investment s net cash inflows and the investment s cost Operating Budget budget needed to run the daily operations of the company Payback length of time it takes to recover the cost of investment in net cash inflows the cost of the capital outlay Payback Period provides management w valuable info on how fast the cash invested will be recouped used to screen potential investments from those that are less desirable Participative Budgeting Involves many levels of management disadvantage slack Performance Report compares actual revenues and expenses against budgeted figures Performance Scorecard Dashboard report that allows managers to visually monitor and focus on managing the company s key activities and strategies as well as business risks Post Audit help companies determine whether investments are going well deserve continued support or if they should abandon the project sell the assets if possible managers use them to estimate net cash inflow projections for future projects Practical Standards are based on currently attainable conditions make best cost benchmark provide employee motivation Profitability Index present value index measure of the of dollars returned for every dollar invested Residual income RI determines whether the division has created any excess or residual income above and beyond management s expectations Incorporates target rate of return Responsibility Accounting system for evaluating the performance of each responsibility center and its manager Responsibility Center manager is accountable for planning and controlling certain activities Return on Investment ROI