Chapter 10-Performance Evaluation Lesson

1

Managerial Accounting

Seventh Edition

Chapter 10

Performance Evaluation

2

Learning Objectives (1 of 2)

10.1 Understand decentralization and describe different types

of responsibility centers

10.2 Develop performance reports

10.3 Calculate R O I, sales margin, and capital turnover

10.4 Describe strategies and mechanisms for determining a

transfer price

10.5 Prepare and evaluate flexible budget performance

reports

10.6 Describe the balanced scorecard and identify K P Is for

each perspective

3

Learning Objectives (2 of 2)

10.7 Describe basic data visualization types and uses
10.8 Apply Excel to use the AB S and I F functions to calculate

and label variances

4

Learning Objective 1

Understand decentralization and describe different types of
responsibility centers

5

Multiple Choice

Juan is a high performer at work. His company values his strong work ethic and skilled labor. At the end of the year, his company rewarded him with a promotion and a bonus. This is an example of which management practice?

1

Employment Security

2

High Wages Contingent on Organizational Performance

3

Training and Skill Development

4

Sharing Information

6

Multiple Choice

Madison and Ethan are applying for the same job. Madison is an experienced candidate and Ethan has no experience. The company is looking for a candidate with experience, and they therefore hire Madison. This is an example of which management practice?

1

Employment Security

2

Selective Hiring

3

Training and Skill Development

4

Reduction of Status Differences

7

Multiple Choice

What empowers employees to make decisions, initially resides at the top levels of a company, and is delegated to middle- and lower-level managers in a decentralized organization?

1

Authority

2

Responsibility

3

Accountability

8

Multiple Choice

EVA stands for…

1

Economic Value of Assets

2

Economically Varied Assets

3

Extra Variable Assets

4

Economic Value Added

9

Decentralization (1 of 2)

• Decentralize: split operations into different operating

segments; management delegates decision-making
responsibilities

• May be based on:

– Geographic area
– Product line
– Distribution channel
– Customer base
– Business function

10

Decentralization (2 of 2)

• Advantages

– Frees top management’s time
– Encourages use of expert knowledge
– Improves customer relations
– Provides training
– Improves motivation and retention

• Disadvantages

– Potential duplication of costs
– Potential problems achieving goal congruence

11

Performance Evaluation

• Provides management with feedback it needs to maintain

control over the entire organization

• To be effective, performance evaluation system should:

– Clearly communicate expectations
– Provide benchmarks that promote goal congruence
– Motivate segment managers

12

Multiple Choice

WHAT IS THE PERFORMANCE MANAGEMENT DEFINITION ?

1

To reach organizational mission and goals

2

Encourageand reward behaviors aligned with aligned with organizational mission and goals

3

Continous process of identifying measuring and developing the performance of individuals and teams

4

Process of assessing the performance and progress of an employee on a given job and his potential for future development

13

Multiple Choice

Which is Performance Management major components?

1

Alignment with strategic goals

2

Accessing performance and progress

3

Process beings with setting up standard appraising

4

Requires choosing right techniques

14

Responsibility Accounting

• Responsibility center: part of an organization whose

manager is accountable for planning and controlling
certain activities
– E X: lower-level managers often responsible for

budgeting and controlling costs of a single value chain
function

• Responsibility accounting: system for evaluating the

performance of each responsibility center and its manager
– Performance reports compare budgets with actual

results for each center

15

Multiple Choice

The Sarbanes-Oxley Act of 2002 mandates that:

1

each business will determine who should take responsibility for the accuracy and completeness of corporate financial reports.

2

senior executives take individual responsibility for the accuracy and completeness of corporate financial reports.

3

CPAs take responsibility for the accuracy and completeness of corporate financial reports.

4

boards of directors take responsibility for the accuracy and completeness of corporate financial reports.

16

Multiple Choice

The main principle of GAAP is

1

competitiveness.

2

consistency.

3

unbiased.

4

ethics

17

Responsibility Centers

18

Multiple Choice

What does a Cost Center focus on?

1

Generating revenue

2

Managing investments

3

Minimizing expenses

4

Maximizing profit

19

Organization Chart

20

Learning Objective 2

Develop performance reports

21

Responsibility Center Performance
Reports (1 of 2)

• Performance report: compares actual revenues and

expenses against budgeted figures

• Variance: difference between actual and budget

– Favorable variance: causes operating income to be

higher than budgeted

– Unfavorable variance: causes operating income to be

lower than budgeted

• Management by exception: only investigate budget

variances that are relatively large

22

Performance Report Highlighting the
Profit Center’s Segment Margin

23

Learning Objective 3

Calculate R O I, sales margin, and capital turnover

24

Multiple Choice

Return on investment (ROI) is one of the most common financial metrics that companies use to evaluate marketing effectiveness. How is ROI calculated?

1

By calculating the amount of money spent and dividing it by total engagement

2

By calculating the amount of money spent and dividing it by the total number of people you have reached

3

By calculating the amount of money spent and dividing it by the number of people who have come to your website

4

By calculating the gain from any spending minus the cost of the investment divided by the cost.

25

Evaluation of Investment Centers

• Duties of investment center manager are similar to those

of a C E O

• Two common performance measures:

– Return on investment ( R O I)
– Residual income

26

Return on Investment (R O I) (1 of 2)

• Measures the amount of income an investment center

earns relative to the size of its assets

• R O I = Operating income / Total assets
• Higher R O I is more desirable

27

Multiple Choice

What is the formula to calculate simple return on investment? (a simple return would have no cost to calculate in)

1

(Ending Value - Beginning Value) / Beginning Value

2

(Ending Value - Beginning Value) / Ending Value

3

(Ending Value + Beginning Value) / Beginning Value

4

(Ending Value - Beginning Value) / (Ending Value + Beginning Value)

28

Return on Investment (R O I) (2 of 2)

2020 Division Data (All figures are in millions
of dollars)

Operating

Income
Assets
Sales

Revenue

North America Beverages (“Beverage”)..........

$1,937

$37,079

$22,559

Frito-Lay North America (“Snack”)...............

$5,340

$8,730

$18,189

Beverage Division R O I = $1,937/$37,039 = 5.2%

Snack Division R O I = $5,340/$8,730 = 61.2%

29

Sales Margin—Example

• Focuses on profitability by showing how much operating

income the division earns on every $1 of sales revenue

Sales margin = Operating income / Sales

Beverage Division Sales Margin = $1,937/$22,559 = 8.6%

Snack Division Sales Margin = $5,340/$18,189 = 29.4%

30

Residual Income (R I)

•Determines whether the division has created any excess
income above and beyond management’s expectations

R I = Operating income – Minimum acceptable income

(

)
RI

Operating income – Target rate of return x Total assets=

(

)

(

)

Beverage Division RI

$1,937 – 25% x $37,079

$ 7,332.8 million

=

(

)

Snack Division RI

$5,340 – 25% x $8,730

$3,157.5 million

=

31

Summary of Investment Center
Performance Measures

Performance
Measure

Formula

ROI

A formula reads R O I equals operating income over total assets.

Sales Margin

A formula reads sales margin equals operating income over sales.

Capital Turnover

A formula reads capital turnover equals sales over total assets.

Residual Income

A formula reads R I equals operating income minus left parenthesis target rate of return times total assets right parenthesis.

Operating income
ROI

Total assets

=

Operating income
Sales margin

Sales

=

Sales
Capital turnover

Total assets

=

(

)
RI

Operating income – Target rate of return

Total assets

=



32

Multiple Choice

The amount of profit generated by the firm in relation to the amount invested by the owners.

1

return on investment

2

ratio

3

working capital

4

inventory turnover

33

Measurement Issues

• Which balance sheet date should we use?
• Should we include all assets?
• Should we use the gross book value or net book value of

the assets?

• Should we make other adjustments to income or assets?

34

Limitations of Financial Performance
Evaluation

• Short-term focus
• Potential remedy: management can measure financial

performance using a long-term time horizon
– Focus on the triple-bottom line

35

Learning Objective 4

Describe strategies and mechanisms for determining a
transfer price

36

Transfer Pricing (1 of 2)

• Transfer pricing: price charged for the internal sale of

products between two different divisions of the same
company
– Becomes sales revenue to selling division
– Becomes a cost to the buying division

• Affects operating income, R O I, sales margin, and residual

income

• Optimize overall profitability by encouraging a transfer

price only if the company would benefit from the exchange

37

Transfer Pricing (2 of 2)

• Optimize overall profitability by encouraging a transfer

price only if the company would benefit from the exchange

• Vertical integration: purchasing other companies within

one’s supply chain to maximize profits

38

Strategies for Determining Transfer
Price

39

Global Considerations

• Do the divisions operate under different taxing authorities

such that income tax rates are higher for one division than
the other?

• Would the amount paid for customs and duties be

impacted by the transfer price?

40

Learning Objective 5

Prepare and evaluate flexible budget performance reports

41

Flexible Budget

• Flexible budget: A budget prepared for a different level of

volume than the one originally anticipated
– “Apples-to-apples” comparison
– For performance evaluation purposes at the end of the

period

– Actual sales volume x Budgeted assumptions

• Comprehensive budget variance: difference between the

actual revenues and expenses and the comprehensive
planning budget
– “Apples-to-oranges” comparison
– Comprehensive budget—planning purposes at the

beginning of the period

42

Comprehensive Budget Performance
Report

43

Flexible Budget Performance Report

44

Volume Variance

• Volume variance: the difference between the

comprehensive budget and the flexible budget

• Arises only because the actual volume differs from the

volume originally anticipated in the comprehensive budget

45

Volume Variances

46

Flexible Budget Variance

• Flexible budget variance: difference between the flexible

budget and actual results

• Highlights variance due to causes other than volume

47

Flexible Budget Variances and
Volume Variances

48

Underlying Causes of Variances

49

Investigating Causes for the
Variances

• Management by exception
• Need performance reports to understand how operational

decisions affected the company’s finances

• Manufacturing cost variances receive a great deal of

attention

50

Learning Objective 6

Describe the balanced scorecard and identify K P I s for each
perspective

51

Nonfinancial Performance
Measurement

• Lag indicators: tend to reveal results of past decisions

and actions
– Financial performance measures

• Lead indicators: performance measures that predict

future performance

52

The Balanced Scorecard

• Balanced scorecard: recognizes that management must

consider both financial performance measures and
operational performance measures
– Represents a major shift in corporate performance

measurement → financial indicators are no longer the
sole measure of performance

• Key performance indicators ( K P I s): summary

performance metrics used to assess how well a company
is achieving its goals
– Reported on performance scorecard

53

The Four Perspectives of the
Balanced Scorecard

54

Linking Company Goals to K P I s

55

Financial Perspective

56

Customer Perspective

57

Internal Business Perspective

58

Learning and Growth Perspective

59

Sustainability and Performance
Evaluation

• Incorporate relevant sustainability K P I s in performance

evaluation system

• In 2020, PepsiCo updated its sustainability-related goals

focusing on six areas:
–

Product

–

Water

–

Packaging

–

Climate

–

People

–

Agriculture

60

Learning Objective 7

Describe basic data visualization types and uses

61

Data Visualization

• Art and science of communicating quantitative information

through visual presentations

• Basic chart types

– Line chart
– Column chart
– Bar chart
– Scatter plot
– Pie chart

62

Line Chart

• Shows trends and changes in data over time

63

Column Chart

• Compares values for different categories

64

Bar Chart

• Column charts shown horizontally; useful for long

category names or greater than seven categories

65

Scatter Plot

• Shows the relationship between two variables where one

variable is correlated with the other

66

Pie Chart

• Represents the composition of a category; poor type of

chart to use

67

General Design Guidelines

• Keep the audience in mind
• Keep visualizations simple
• Avoid using “stoplight colors”
• Be consistent with formatting

68

Learning Objective 8

Apply Excel to use the A B S and I F functions to calculate and
label variances

69

How Can Managers Use Data
Analytics for Performance
Evaluation? (1 of 2)

Exhibit 10.26 shows a partial listing of company data that will
serve as the basis for June’s performance report for Barrio
Tacos

70

How Can Managers Use Data
Analytics for Performance
Evaluation? (2 of 2)

Exhibit 10.27 illustrates two Excel functions—A B S and I F—
that can aid managers in calculating and labeling variances

71

How to Use the A B S Function to
Find the Absolute Value (1 of 2)

1. Select the cell where you want the absolute value returned

(D3 in the example)

2. Type = A B S(B3-C3) or = A B S(C3-B3)
3. Copy the function down to the cells below D3 by double

clicking the fill handle or drag and drop the fill handle to all
cells below

72

How to Use the A B S Function to Find
the Absolute Value (2 of 2)

4. Format as desired using the formatting icons on the

ribbon. We selected Column D with the cursor and then
used accounting currency with no decimal places.

73

How to Use the I F Function for a
True/False Logic Test (1 of 4)

1. Start by selecting the cell where you want the logic value

returned. In our example, we selected cell E3.

74

How to Use the I F Function for a
True/False Logic Test (2 of 4)

2. Next, click on the Formulas tab on the ribbon, and then

click the drop-down arrow below Logical and then select I
Ffrom the list of logical functions provided.

75

How to Use the I F Function for a
True/False Logic Test (3 of 4)

3. The I F dialog box will open. Three pieces of information

are required: the logic condition you want to test, the label
(or number) you want returned if it’s true, and the label (or
number) you want returned if its false. Then click O K.

76

How to Use the I F Function for a
True/False Logic Test (4 of 4)

4. Drag and drop the fill handle to copy the function to the

remaining revenue accounts.

5. Repeat the same steps for the expense accounts, keeping

in mind that the expense accounts go in the opposite
direction as revenue accounts.

77

Copyright

This work is protected by United States copyright laws and is
provided solely for the use of instructors in teaching their courses
and assessing student learning. Dissemination or sale of any part
of this work (including on the World Wide Web) will destroy the
integrity of the work and is not permitted. The work and materials
from it should never be made available to students except by
instructors using the accompanying text in their classes. All
recipients of this work are expected to abide by these restrictions
and to honor the intended pedagogical purposes and the needs of
other instructors who rely on these materials.

Chapter 10-Performance Evaluation

Similar Resources on Wayground

Popular Resources on Wayground

Discover more resources for Computers