Managerial accounting and introduction to concepts methods and user 11e by maher chapter 11

CHAPTER 11 PowerPoint Presentation by LuAnn Bean Professor of Accounting Florida Institute of Technology Investment Center Performance Evaluation © 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Managerial Accounting 11E Maher/Stickney/Weil ☼ CHAPTER GOAL ☼ Chapter 11 discusses concepts and methods for measuring performance and controlling activities in multidivisional companies that have both manufacturing and nonmanufacturing divisions LO DIVISION: DIVISION: Definition Definition Is a segment that conducts both production and marketing activities LO DIVISIONS A A division division may may be be aa profit profit center, center, responsible responsible for for revenues revenues and and operating operating costs costs A A division division may may also also be be an an investment investment center, center, responsible responsible for for assets assets in in addition addition to to revenues revenues and and operating operating costs costs LO ADVANTAGES OF DECENTRALIZATION Major advantages of decentralization (authority and responsibility are delegated from top management) include:  Enabling local personnel to respond quickly to a changing environment  Freeing top management from detailed operating decisions  Dividing large, complex problems into manageable pieces  Training managers and providing a basis for evaluating their decision-making performance  Motivating ambitious managers DISADVANTAGES OF DECENTRALIZATION LO Major disadvantages of decentralization include: Local managers not act to achieve the overall goals of the organization Possible conflicts between goals of a division and those of the organization LO PERFORMANCE EVALUATIONS Top Top management management should should distinguish distinguish between between an an organizational organizational division division and and the the division division manager manager Many Many measures measures used used to to evaluate evaluate divisions divisions can/should can/should be be adjusted adjusted to to account account for for revenues, revenues, costs, costs, and and investments investments that that are are controllable controllable by by its its manager manager LO RETURN RETURN ON ON INVESTMENT INVESTMENT (ROI): (ROI): Definition Definition Is a method of evaluating performance based on assets invested ROI = Division operating profit ÷ Division Investment LO QUESTIONS FOR ROI Before applying ROI, managers must find answers to several questions: How does the firm measure revenues? Which costs does the firm deduct in measuring divisional operating costs? How does the firm measure investment? LO TRANSFER TRANSFER PRICE: PRICE: Definition Definition Is the value assigned to goods or services transferred from one unit to another within the organization 10 LO TRANSFER PRICING POLICIES Management has several choices for transfer pricing policies Other motivational aspects Dual pricing Provides selling division with profit but charges buying division with costs only Other incentives Balanced scorecard Basing part of supplying manager’s bonus on purchasing center’s profits 14 LO NEGOTIATED PRICES There There are are advantages advantages and and disadvantages disadvantages to to having having managers managers negotiate negotiate transfer transfer prices prices   Advantage: Advantage: preserves preserves autonomy autonomy of of division division managers managers   Disadvantages Disadvantages   Consumes Consumes management management time time   May May depend depend on on manager’s manager’s negotiating negotiating ability ability 15 LO DECISION RULE The economic transfer pricing rule to maximize Company profits is to Transfer at the differential outlay cost to the selling division (VC), + opportunity cost of making internal transfers ($0 with idle capacity; selling price – VC with no idle capacity) 16 LO DIRECT DIRECT and and INDIRECT INDIRECT COSTS: COSTS: Definition Definition Refers to whether cost associates directly with the division 17 LO CONTROLLABLE CONTROLLABLE and and NONNONCONTROLLABLE: CONTROLLABLE: Definition Definition Refers to whether the division manager can affect the cost 18 DIRECT and INDIRECT COSTS LO Managers Managers should should be be held held responsible responsible for for direct direct costs costs (any (any cost cost necessary necessary to to operate) operate) They They are are always always deducted deducted for for performance performance evaluation evaluation of of aa division division whereas whereas manager manager evaluation evaluation should should only only include include direct direct costs costs that that are are controllable controllable Similarly, Similarly, divisions divisions can can partially partially control control indirect indirect controllable controllable costs costs 19 LO ROI COMPONENTS Management Management must must decide decide (a) (a) which which assets assets to to include include in in the the investment investment base base and and (b) (b) what what valuation valuation to to use use for for those those assets assets Problems Problems occur occur when when assets assets are are shared shared among among divisions divisions or or when when considering considering centralized centralized services services Valuation Valuation may may be be net net or or gross gross book book value value 20 LO PROFIT MARGIN ROI = Profit Margin Divisional Revenues X PROFIT MARGIN PERCENTAGE Divisional Revenues Divisional Investment INVESTMENT TURNOVER RATIO 21 LO PROFIT PROFIT MARGIN MARGIN PERCENTAGE: PERCENTAGE: Definition Definition Indicates the portion of each dollar of revenue that is profit 22 LO INVESTMENT INVESTMENT TURNOVER TURNOVER RATIO: RATIO: Definition Definition Is the ratio of divisional sales to investment in divisional assets; a measure of the effective use of invested funds 23 LO MINIMUM ROI Management Management must must set set aa standard standard or or desired desired ROI ROI rate rate for for each each period period and and aa minimum minimum ROI ROI for for each each division division 24 LO ECONOMIC ECONOMIC VALUE VALUE ADDED ADDED (EVA): (EVA): Definition Definition Is the amount of earnings generated above the cost of funds invested to generate those earnings 25 LO EVA EVA = Net operating profit after tax (Weighted-average cost of capital X Investment) Where Investment is (Total Assets – Noninterest-bearing current liabilities) 26 LO Adjusting GAAP data for incentive plans The main adjustments made to GAAP data for incentive plans include: Capitalize/amortize R & D expenditures and customer development, advertising, promotion expenditures Capitalize/amortize employee training expenditures Make price-level adjustments Use market values of assets to assess value declines Restate inventories at replacement cost Do not amortize goodwill 27 End of CHAPTER 11 28 ...☼ CHAPTER GOAL ☼ Chapter 11 discusses concepts and methods for measuring performance and controlling activities in multidivisional companies that have both manufacturing and nonmanufacturing... prices Methods Methods of of setting setting transfer transfer prices prices include: include: 1 Top Top management management intervenes intervenes to to set set prices prices 2 Top Top management... division and and the the division division manager manager Many Many measures measures used used to to evaluate evaluate divisions divisions can/should can/should be be adjusted adjusted to to account