chapter 22b – Flashcards

-*involves accumulating and reporting costs* on the basis of the manager who has the authority to make the day-to-day decisions about the items -means a manager's performance is evaluated on the matters *directly under the manager's control*

-any individual who has control and is accountable for activities -may extend from the lowest levels of management to the top strata of management -especially valuable in a decentralized company

control of operations delegated to many managers throughout the organization

area of responsibility for which reports are prepared

-contain only *data that are controllable by the manager* of the responsibility center -provide *accurate and reliable budget data* to measure performance -*highlight significant differences* between actual results and budget goals -are *tailor-made* for the intended evaluation -are *prepared at reasonable intervals*

1. Distinguishes between *controllable* and *noncontrollable* costs. 2. Emphasizes or includes *only items controllable by the individual manager* in performance reports

whether the cost or revenue is controllable at the level of responsibility with which it is associated

-all costs controllable by top management (at the top, everything is controllable) -fewer costs of controllable as one moves down to lower levels of management

costs incurred directly by a level of responsibility that are controllable at that level

costs incurred indirectly which are allocated to a responsibility level

information is also different

-also permits comparative evaluations -plant managers can rank each department manager's effectiveness in controlling manufacturing costs -comparative rankings provide incentive for a manager to control costs

-cost centers -profit centers (sales - cost) -investment centers (profit/amount of investment) •type indicates degree of responsibility that mangers have for the performance of the center

-incurs costs but does not directly generate revenues -managers have authority to incur costs -managers evaluated on ability to control costs -usually a production department or a service department *expenses*

-incurs costs and generates revenues -managers judged on profitability of center -examples include individual departments of a retail store or branch bank offices *expenses & revenues*

-incurs costs, generates revenues, and has investment funds available for use -manager evaluated on profitability of center and rate of return earned on funds -often a subsidiary company or a product line -manager able to control or significantly influence investment decisions such as plant expansion *expenses & revenues & return on investment*

-based on detailed information about both *controllable revenues* and *controllable costs* -manager *controls operating revenues* earned, such as sales -manager *controls all variable costs* incurred by the center because they vary with sales

sales-VC=CM CM-FC Controllable=Controllable Margin

-relate specifically to one responsibility center -incurred for the sole benefit of the center -called *traceable costs* since they can be traced directly to one center -*most controllable* by the profit center manager

-pertain to a company's overall operating activities -incurred for the benefit of more than one profit center -called *common costs* since they apply to more than one center -most are *not controllable* by the profit center manager

-shows *budgeted* and *actual controllable* revenues and costs -prepared using the cost-volume-profit income statement format: •deduct controllable fixed costs form the contribution margin •controllable margin •best measure of manager's performance in controlling revenues and costs •do *not* report noncontrollable costs

excess of contribution margin over controllable fixed costs

-primary basis for evaluating the performance of a manager of an investment center -shows the effectiveness of the manager in using the assets at his/her disposal -useful performance measure -factors in ROI formula are controllable by manager

controllable margin/average operating assets -operating assets include *current assets and plant assets used in operations* by the center and controlled by manager -exclude *nonoperating assets* such as idle plant assets and land held for future use -base average operating assets on the beginning and ending cost or book values of the assets

responsibility report -scope of manager's responsibility affects content -investment centers is an independent entity for operating purposes -*all fixed costs controllable by center manager* -shows budgeted and actual ROI below controllable margin

-valuation of operating assets •may be valued at acquisition costs, book value, appraised value, or market value •each alternative provides reliable basis for evaluating performance as long as it is consistently applied between periods -margin (income) measure: •may be controllable margin, income form operations, or net income •only controllable margin is a valid basis for evaluating performance of investment center manager

-increase sales -reduce variable and controllable fixed costs

human factor critical in evaluating performance

-managers should have *direct input into the process of establishing budget goals* for their area of responsibility •criticism of noncontrollable matters reduces effectiveness of evaluation •may lead to negative reactions by manager and doubts about fairness of evaluation -the evaluation should be *based entirely on matters that are controllable by the manager •without this input, managers may view goals as unrealistic or arbitrary •affects motivation to meet targets -the evaluation process must allow managers to *respond to their evaluations* •evaluation is not a one-way street •managers must be able to defend their performance •evaluation without feedback is impersonal and ineffective -the evaluation should *identify both good and poor performance* •praise is a powerful motivator •manager compensation should include rewards for meeting goals

-incorporates financial and nonfinancial measures in an integrated system that links performance measurement and a company's strategic goals -evaluates company performance from a series of "perspectives" financial, customer, internal process, and learning & growth

1. Employs both financial and nonfinancial measures. 2. Creates linkages so that high-level corporate goals can be communicated all the way down to the shop floor. 3. Provides measurable objectives for such nonfinancial measures as product quality, rather than vague statements such as "We would like to improve quality". 4. Integrates all of the company's goals into a single performance measurement system, so that an inappropriate amount of weight will not be placed on any single goal.