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Chapter 10 Notes

by: Rachel Moore

Chapter 10 Notes ACCT 2102

Rachel Moore
GPA 3.33

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These notes cover Chapter 10, which was discussed in class April 4th through April 8th.
Principles of Accounting II
Class Notes
chapter 10, ACCT 2102, Farmer, variance
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This 4 page Class Notes was uploaded by Rachel Moore on Saturday April 9, 2016. The Class Notes belongs to ACCT 2102 at University of Georgia taught by Farmer in Spring 2016. Since its upload, it has received 103 views. For similar materials see Principles of Accounting II in Accounting at University of Georgia.


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Date Created: 04/09/16
ACCT 2102 April 4, 2016 – April 8, 2016 Chapter 10 Notes Performance Evaluation Companies decentralize their operations into operating segments based on • Geographic lines • Product lines • Responsibility centers o Cost – compare actual costs to budgeted costs using performance reports (BVA) o Revenue – compare actual revenue to budgeted revenue using performance reports (BVA) o Profit – compare actual revenues, expenses, and profits to the budget using performance reports (BVA) and segmented income statements o Investment – determine if assets were used efficiently to generate profit using return on investment and residual income A BVA compares actual revenue and expenses against budgeted revenue and expenses to calculate a variance. When a budget is prepared for a single level of activity, it is a static budget. Three different variances can be calculated • Master budget variance o Difference between actual results vs. static budget • Flexible budget variance o Difference between actual results vs. flexible budget • Volume variance o Difference between flexible budget vs. static budget o Master budget variance – volume variance = flexible budget variance Variances are labeled as favorable (F) or unfavorable (U) • Variance is all about relationships • Revenue: Actual > Budget (F); Actual < Budget (U) • Expenses: Actual < Budget (F); Actual > Budget (U) Variances are analyzed using management by exception (material vs. immaterial) • Does it matter? o Material ▯ matters o Immaterial ▯ doesn’t matter o Example: a business has a materiality threshold of $10,000. ▯ Any variance less than $10,000 doesn’t matter (immaterial). ▯ Any variance greater then $10,000 matters (material). Created By: Rachel Moore Not for redistribution. o Not every company/individual has the same materiality threshold. o The bigger the business, the greater the threshold. $6,000 (U) $18,000 (F) $3,000 (F) $10,000 (U) $4,000 (F) -- 1. How many units of output did the company anticipate selling? 5 2. Why is the Flexible Budget based on an output of 6? Actual/results 3. Determine the budgeted unit Sales Price and budgeted unit Variable Cost. ???????? = $90,000 ÷ 5 = $18,000 ???????????????? ???????? = $50,000 ÷ 5 = $10,000 4. Why are the Fixed Expenses the same in the Flexible Budget and Master Budget columns? Because they are fixed. 5. Complete the report and provide a reasonable explanation for variances greater than $5,000. ???????? – ???????? = ???????? – ???????????????????????????????????? ???????? = ???????? ($30 × 20,000)×(40%) − $250,000 = −$10,000 ($45 × 10,000)×(50%) − $100,000 = $125,000 Should the manager be judged on the SM? Maybe/maybe not. The manager has to have some say so in the costs for the manager to be judged Controlable vs. traceable Created By: Rachel Moore Not for redistribution. Review from Monday & Wednesday: 1. BVA • Variances o Labels ▯ Favorable vs Unfavorable ▯ Material vs Immaterial o Types ▯ Master ▯ Flexible ▯ Volume 2. Segmented IS • ???????? – ???????? = ???????? – ???????????????????? ???????? = ???????? • SM is the amount that we judge our segment on. • Controllable vs Uncontrollable o When judging a person, we need to know what’s traceable and controllable. o When judging a segment, we need to know whats traceable and common. o Example: Only $200,000 of total $250,000 FC is controllable, how do we judge the manager? The Controllable Margin is $50,000 higher than the Segment Margin. Return on Investment (ROI) measures the amount of income an investment center earns relative to the size of its assets. ???????????? = ???????????????????? ???????????????????????? × ????????????????????????????/???????????????????????????????????????? ???????????????????????????????? ???????????????????????? ???? ???????????? = ???????????????????????????? Residual Income (RI) determines whether the division has created any excess income above and beyond management’s expectations. ???????? = ???????????????????????????????????? ???????????????????????? − (???????????????????????? ???????????????? ???????? ???????????????????????? × ???????????????????? ????????????????????????) Created By: Rachel Moore Not for redistribution. Plain ROI: 11.3% × 1.02 = 11.5% • Sales Margin: $161,000 ÷ $1,423,000 = 11.3% • Investment Turnover: $1,423,000 ÷ $1,396,000 = 1.02 Peanut ROI: 7.4% × 1.61 = 11.9% • Sales Margin: $43,000 ÷ $578,000 = 7.4% • Investment Turnover: $578,000 × $360,000 = 1.61 Assume the company has $10,000 in excess funds to invest in either Plain or Peanut. In which division should the company invest? Peanut. Assume the company’s target rate of return is 25%. Compute each division’s RI. Plain: -$188,000 Peanut: -$47,000 Each manager is presented with an $100,000 investment opportunity that will generate operating income of $17,000. The company’s target rate of return is 15%. Investments ROI = 17% Hurdle Rate = 15% 1. They will receive a bonus based solely on their ability to exceed their division’s prior period return on investment. Brutus ROI = 18% ▯ Reject investment; 17% is less than 18% Nero ROI = 16% ▯ Accept investment; 17% is more than 16% 2. They will receive a bonus based solely on their ability to exceed their division’s prior period residual income. Both accept because the investment has a positive RI. Created By: Rachel Moore Not for redistribution.


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