Management Accounting Fundamentals Module 8 Fixed overhead analysis and reporting for control

Transcription

1 Management Accounting Fundamentals Module 8 Fixed overhead analysis and reporting for control Lectures and handouts by: Shirley Mauger, MBA, HB Comm, CGA Module 8 - Table of Contents Part Content Overhead rates and standard costing 8.2 Fixed overhead budget and volume s 8.3 Journal entries to record standard costs and s N/A 8.4 Computer illustration 8.4-1: Fixed costs in a flexible budget Full income statement analysis 8.6 Decentralization in organizations 8.7 Segment reporting Revenue and marketing expense analysis Return on investment and residual income 8.10 Balanced scorecard 8.11 Other performance measures 2 Module 8 - Table of Contents Part Content 5 Review question: Variance analysis and journal entries 6 Review question: Variance analysis, working backwards from data 7 Review question: Segmented statements 8 Review question: Segmented statements, ROI and residual income 9 Review question: Sales and market s (High low method) 10 Review question: Multiple choice 3 1

2 Cost of store rent MA1 MODULE 8 Part 1 Overhead rates and standard costing Fixed overhead budget and volume s Journal entries to record standard cost s Topics Part 1 Overhead rates and standard costing (Topic 8.1) Explain the significance of the denominator activity figure in determining the standard cost of a unit of product. (Level 1) Fixed cost: Total cost remains constant regardless of changes in activity Unit cost becomes smaller as the activity increases. e.g. The rental cost for the sports retailer s shop is fixed Number of skateboards sold Cost of rent per skateboard Total cost of rent 1 $2,000 $2,000 2 $1,000 $2, $20 $2,000 Skateboards sold 5 Part Overhead rates and standard costing (Topic 8.1) Parker Co. Actual Flexible budget Flexible budget Sales volume Static budget Activity level 1, , U 1,500 Sales: $300 $410,000 20,000 F $390,000 $ 60,000 U $450,000 Direct mat. (180,000) 16,200 U (163,800) 25,200 F (189,000) Direct labour (87,800) 9,800 U (78,000) 12,000 F (90,000) Variable OH (62,200) 5,000 U (57,200) 8,800 F (66,000) Fixed OH (61,500) 9,000 U (52,500) 0 (52,500) Income from operations $ 18,500 $20,000 U $38,500 $14,000 U $52,500 Stop the audio, turn to page 1 of handout 1. (ma1_mod8_handout1.pdf) 6 2

3 Part Overhead rates and standard costing (Topic 8.1) Parker Co. Module 7 review Actual Flexible Flexible Sales Static Calculate all s budget budget volume budget Activity level 1, , U 1,500 Sales: $300 $410,000 20,000 F $390,000 $ 60,000 U $450,000 Direct mat. (180,000) 16,200 U (163,800) 25,200 F (189,000) Direct labour (87,800) 9,800 U (78,000) 12,000 F (90,000) Variable OH (62,200) 5,000 U (57,200) 8,800 F (66,000) Fixed OH (61,500) 9,000 U (52,500) 0 (52,500) Income from operations $ 18,500 $20,000 U $38,500 $14,000 U $52,500 Handout 1, page 1 7 Part Overhead rates and standard costing (Topic 8.1) (1) AQ x AR $180,000 Direct materials s (2) AQ x SR 14,400 x $12.6 =$181,440 (3) SQ x SR 1300 x 10 x $12.60 = $163,800 Price : $180, ,440 =$1,440 F Quantity : $181, ,800 =$17,640 U Total 180, ,800=16,200 U Handout 1, page 1 8 Part Overhead rates and standard costing (Topic 8.1) (1) AQ x AR $180,000 Direct materials s (2) AQ x SR 14,400 x $12.6 =$181,440 (3) SQ x SR 1300 x 10 x $12.60 = $163,800 Price : $180, ,440 =$1,440 F Quantity : $181, ,800 =$17,640 U Total 180, ,800=16,200 U Handout 1, page 1 9 3

4 Part Overhead rates and standard costing (Topic 8.1) Direct labour s (1) AQ x AR $87,800 (2) AQ x SR 6500 x $12 = $78,000 (3) SQ x SR 1300 x 5 x $12 = $78,000 Rate : $87,800 78,000 = $9,800 U Efficiency : $78,000 78,000 = 0 Total 87,800 78,000 = $9,800 U Handout 1, page 1 10 Part Overhead rates and standard costing (Topic 8.1) Variable overhead s (1) AQ x AR $62,200 (2) AQ x SR 6500 x $8.80 = $57,200 (3) SQ x SR 5 x 1300 x $8.80 = $57,200 Spending : $62,200 - $57,200 = $5,000 U Efficiency : $57,200 57,200 = 0 Total $62,200 57,200 = $5,000 U Handout 1, page 1 11 Part Overhead rates and standard costing (Topic 8.1) Parker Co. Budget and Actual Flexible Flexible Sales Static production volume s budget budget volume budget Activity level 1, , U 1,500 Sales: $300 $410,000 20,000 F $390,000 $ 60,000 U $450,000 Direct mat. (180,000) 16,200 U (163,800) 25,200 F (189,000) Direct labour (87,800) 9,800 U (78,000) 12,000 F (90,000) Variable OH (62,200) 5,000 U (57,200) 8,800 F (66,000) Fixed OH (61,500) 9,000 U (52,500) 0 (52,500) Income from operations $ 18,500 $20,000 U $38,500 $14,000 U $52,500 Handout 1, page

5 Part Overhead rates and standard costing (Topic 8.1) STANDARD COST CARD 1 DESK Direct materials: $126 Direct labour (5 hours at $12/hour 60 Variable overhead (5 DLH at $8.80/hour) 44 *Fixed overhead (5 DLH at $7.00/hour) 35 Total standard costs per desk: $265 (*Based on a denominator level of activity of 1,500 desks.) Handout 1, page 1 13 Part Overhead rates and standard costing (Topic 8.1) Applying overhead costs Fixed overhead Estimated total fixed manufacturing overhead cost Estimated total units in the allocation base Handout 1, page 1 $52,500 Denominator level of activity 1,500 desks x 5 hours per desk = 7,500 hours Predetermined = overhead rate $7.00 per direct labour hour p Part Overhead rates and standard costing (Topic 8.1) Applying overhead costs in a standard costing system Fixed overhead Manufacturing overhead Actual costs incurred Overhead applied Manufacturing overhead $61,500 1,300 desks at $7 per DLH x 5 hours = $45,500 $16,000 underapplied Handout 1, page 1 p

6 Part 1 Fixed overhead budget and volume s (Topic 8.2) Compute and properly interpret the fixed overhead budget and volume s. (Level 1) (1) Actual cost $61,500 Fixed overhead s (2) BU x SQ x SR Budgeted units = Denominator level of activity (3) AU x SQ x SR Budget : (1)-(2) Volume : (2)-(3) Total (1)-(3) Handout 1, page 1 p Part 1 Fixed overhead budget and volume s (Topic 8.2) (1) Actual cost $61,500 Fixed overhead s (2) BU x SQ x SR Budgeted units = Denominator level of activity (3) AU x SQ x SR 1,300 desks x 5 hours x $7= $45,500 Budget : (1)-(2) Volume : (2)-(3) Total $61,500 - $45,500 = $16,000 U Handout 1, page 1 p Part 1 Fixed overhead budget and volume s (Topic 8.2) (1) Actual cost $61,500 Fixed overhead s (2) BU x SQ x SR 1,500 desks x 5 hours x $7= $52,500 (3) AU x SQ x SR 1,300 desks x 5 hours x $7= $45,500 Budget : (1)-(2) Volume : (2)-(3) Total $61,500 - $45,500 = $16,000 U Handout 1, page 1 p

7 Part 1 Fixed overhead budget and volume s (Topic 8.2) More was spent than planned. Fixed overhead s (1) Actual cost $61,500 (2) BU x SQ x SR 1,500 desks x 5 hours x $7= $52,500 (3) AU x SQ x SR 1,300 desks x 5 hours x $7= $45,500 Budget : $61,500 - $52,500 = $9,000 U Volume : (2)-(3) Total $61,500 - $45,500 = $16,000 U Handout 1, page 1 p Part 1 Fixed overhead budget and volume s (Topic 8.2) (1) Actual cost $61, less units were produced and sold. Fixed overhead s (2) BU x SQ x SR 1,500 desks x 5 hours x $7= $52,500 (3) AU x SQ x SR 1,300 desks x 5 hours x $7= $45,500 Budget : $61,500 - $52,500 = $9,000 U Volume : $52,500 - $45,500 = $7,000 U Total $61,500 - $45,500 = $16,000 U Handout 1, page 1 p Part 1 Journal entries to record standard costs and s (Topic 8.3) Prepare journal entries to record standard costs and s. (Level 2) Formal entries to record s: 1. Raw materials purchases 2. Issuing raw materials to production 3. Incurrence of direct labour 4. Variable and fixed overhead (not demonstrated here) Chapter 10 appendix 10B p

8 Part 1 Journal entries to record standard costs and s (Topic 8.3) Prepare journal entries to record standard costs and s. (Level 2) Formal entries to record s: 1. Raw materials purchases 2. Issuing raw materials to production 3. Incurrence of direct labour 4. Variable and fixed overhead (not demonstrated here) Chapter 10 appendix 10B Stop the audio, turn to Problem p.477 p In the textbook 22 Part 1 Journal entries to record standard costs and s (Topic 8.3) Accounts Payable Raw materials DM price DM quantity Work in progress Wages payable DL rate DL efficiency p Part 1 Journal entries to record standard costs and s (Topic 8.3) 1. A total of 8,000 kilograms of material were purchased at a cost of $46,000 DR Direct materials AQ x SR 8,000 x $ ,000 CR Direct materials price 2,000 AQ x (SR-AR) 8,000 x (6-5.75) CR Accounts Payable AQ x AR 46,000 p

9 Part 1 Journal entries to record standard costs and s (Topic 8.3) Accounts Payable 46,000 Raw materials 48,000 DM price 2,000 DM quantity Work in progress Wages payable DL rate DL efficiency p Part 1 Journal entries to record standard costs and s (Topic 8.3) 2. Issued 6,000 kilograms of materials to production to produce 3,000 units DR DR CR Work in process SQ x SR 3,000 x 1.5 x $6 Direct materials quantity (AQ-SQ)xSR ( 6,000-(3,000x1.5))x$6 Direct materials AQ x SR 6,000 x $6 27,000 9,000 36,000 p Part 1 Journal entries to record standard costs and s (Topic 8.3) Accounts Payable 46,000 Raw materials 48,000 36,000 Wages payable DM price 2,000 DM quantity 9,000 Work in progress 27,000 DL rate DL efficiency p

10 Part 1 Journal entries to record standard costs and s (Topic 8.3) 3. Recorded the direct labour wages for June DR DR CR CR Work in process SQ x SR 3,000 x.6 x $12 Labour rate AQx(AR-SR) (10 x 160 x $12.50-$12) Labour efficiency (AQ-SQ) x SR ((10x160)-(3,000x.6))x$12 Wages payable AQ x AR 10x160x$ , ,400 20,000 p Part 1 Journal entries to record standard costs and s (Topic 8.3) Accounts Payable 46,000 Raw materials 48,000 36,000 Wages payable DM price 2,000 20,000 DL rate 800 DM quantity 9,000 DL efficiency 2,400 Work in progress 27,000 21,600 p MA1 MODULE 8 Part 2 Full income statement analysis Decentralization in organizations Segment reporting Topics

11 Part 2 Full income statement analysis (Topic 8.5) Prepare an income statement incorporating analysis. (Level 2) Absorption Costing Product Costs Period Costs Product and period costs Direct materials Direct labour Variable manufacturing OH Fixed manufacturing OH Variable selling and admin exp. Fixed selling and admin exp. Variable Costing Product Costs Period Costs McGraw-Hill Ryerson Limited., Part 2 Full income statement analysis (Topic 8.5) Absorption Costing Product Costs Period Costs Product and period costs Direct mat. Direct labour VMOH FMOH Variable S&A Fixed S&A Write off all s to cost of goods sold. McGraw-Hill Ryerson Limited., Part 2 Full income statement analysis (Topic 8.5) Income statement format Absorption costing Sales Cost of goods sold (standard costs) Write off s Direct materials price and quantity Direct labour rate and efficiency Variable overhead spending and efficiency Fixed overhead budget and volume Adjusted cost of goods sold Gross profit Variable selling and administration Fixed selling and administration Net income $xxx $xxx xxx xxx xxx xxx xxx xxx xxx xxx $xxx 33 11

12 Part 2 Full income statement analysis (Topic 8.5) Write off all s to cost of goods sold Product and period costs Direct mat. Direct labour VMOH FMOH Variable S&A Fixed S&A Variable Costing Product Costs Period Costs McGraw-Hill Ryerson Limited., Part 2 Full income statement analysis (Topic 8.5) Income statement format Variable costing Sales $xxx Cost of goods sold (standard costs) $xxx Write off s Direct materials price and quantity xxx Direct labour rate and efficiency xxx Variable overhead spending and efficiency xxx Adjusted cost of goods sold xxx Variable selling and administration xxx xxx Contribution margin xxx Fixed manufacturing overhead xxx Fixed selling and administration xxx Net income $xxx 35 Part 2 Decentralization in organizations (Topic 8.6) Differentiate between cost centres, profit centres, and investment centres, and explain how performance is measured in each. (Level 2) Board of directors CEO Decentralization Decision making is spread throughout the organization. Western division Eastern division Director of human resources Consumer products Industrial products Consumer products Industrial products p

13 Part 2 Decentralization in organizations (Topic 8.6) Responsibility accounting Gives managers greater control over their segments. Keeps decisions in the hands of people who see and understand the problems. Serves as a motivating tool. Provides a basis for evaluation. 37 Part 2 Decentralization in organizations (Topic 8.6) Performance is measured based on control over: Investments Costs Revenues Cost centre Profit centre Investment centre p Part 2 Decentralization in organizations (Topic 8.7) Investment centre Responsibility centres Board of directors Cost centre CEO Western division Eastern division Director of human resources Consumer products Industrial products Consumer products Industrial products Profit centres p

14 Part 2 Segment reporting (Topic 8.7) Prepare a segmented income statement using the contribution format, and explain the difference between traceable fixed costs and common fixed costs. (Level 1) Segment Any part or activity of an organization about which the manager seeks cost, revenue or profit data. Chapter 8, p.334 p Part 2 Segment reporting (Topic 8.7) Segment reporting Provides more information on profitability than company wide reports. Can highlight problems and opportunities within an organization. Reduces the effects of cross subsidization Costs not traced directly to the segment. Costs allocated using an inappropriate base. p Part 2 Segment reporting (Topic 8.7) Classifying costs for segment reporting Variable Fixed Traced directly to the segment. Variable cost of goods sold Stop the audio, turn to page 2 of handout 1. (ma1_mod8_handout1.pdf) p

15 Part 2 Segment reporting (Topic 8.7) Classifying costs for segment reporting Variable Traced directly to the segment. Fixed Traceable Directly supports the segment. Can become common as segments are further divided. Salary of the segment manager. Common Supports more than one segment and not traceable to any segment. Salary of the CEO Shared equipment costs p Part 2 Segment reporting (Topic 8.7) Classifying costs for segment reporting Variable Traced directly to the segment. Fixed Traceable Common Supports more than one segment and not traceable to any segment. Discretionary Can be controlled by the segment manager. Advertising for that segment Committed CanNOT be controlled by the segment manager. Depreciation of plant facilities p Part 2 Segment reporting (Topic 8.7) Segment reporting format Sales (Variable costs) = Contribution margin Identifies what happens to profits as volume changes. Useful for short run decisions such as temporary uses of capacity. (chapter 12) p

16 Part 2 Segment reporting (Topic 8.7) Segment reporting format Sales (Variable costs) = Contribution margin (Traceable fixed costs) = Segment margin Useful for long term decisions. Identifies margin available after a segment covers its own costs. A segment that cannot cover its own costs should be discontinued. p Part 2 Segment reporting (Topic 8.7) Segment reporting format Sales (Variable costs) = Contribution margin (Traceable fixed costs) = Segment margin (Common costs) = Net income Corporate wide income p Part 2 Segment reporting (Topic 8.7) Restructuring a segmented income statement Stop the audio, and turn to problem 8-24, page 360 and page 3 of handout

17 Part 2 Segment reporting (Topic 8.7) Restructuring a segmented income statement Variable S. Europe Mid.Europe N.Europe Sales Costs 300, , ,000 Territorial expenses Cost of goods sold 93, , ,000 Salaries 54,000 56, ,000 Insurance 9,000 16,000 14,000 Advertising 105, , ,000 Depreciation 21,000 32,000 28,000 Shipping 15,000 32,000 42,000 Total territorial expenses 297, , ,000 Income/loss before corp.exp. 3, ,000 (56,000) Corporate expenses Advertising (general) 15,000 40,000 35,000 General administrative 20,000 20,000 20,000 Total corporate expenses 35,000 60,000 55,000 Net operating income(loss) (32,000) 124,000 (111,000) problem 8-24, page 360, handout 1, page 3 49 Part 2 Segment reporting (Topic 8.7) Restructuring a segmented income statement Traceable S. Europe Mid.Europe N.Europe Sales fixed costs 300, , ,000 Territorial expenses Cost of goods sold 93, , ,000 Salaries 54,000 56, ,000 Insurance 9,000 16,000 14,000 Advertising 105, , ,000 Depreciation 21,000 32,000 28,000 Shipping 15,000 32,000 42,000 Total territorial expenses 297, , ,000 Income/loss before corp.exp. 3, ,000 (56,000) Corporate expenses Advertising (general) 15,000 40,000 35,000 General administrative 20,000 20,000 20,000 Total corporate expenses 35,000 60,000 55,000 Net operating income(loss) (32,000) 124,000 (111,000) problem 8-24, page 360, handout 1, page 3 50 Part 2 Segment reporting (Topic 8.7) Restructuring a segmented income statement S. Europe Mid.Europe N.Europe Sales 300, , ,000 Territorial expenses Cost of goods sold 93, , ,000 Salaries 54,000 56, ,000 Insurance 9,000 16,000 14,000 Advertising 105, , ,000 Depreciation 21,000 32,000 28,000 Shipping Common 15,000 32,000 42,000 Total territorial fixed expenses costs 297, , ,000 Income/loss before corp.exp. 3, ,000 (56,000) Corporate expenses Advertising (general) 15,000 40,000 35,000 General administrative 20,000 20,000 20,000 Total corporate expenses 35,000 60,000 55,000 Net operating income(loss) (32,000) 124,000 (111,000) problem 8-24, page 360, handout 1, page

18 Part 2 Segment reporting (Topic 8.7) SOLUTION - In s Total S. Eur. Mid.Eur. N.Eur. Sales 1,800, , , ,000 Less variable expenses: Cost of goods sold 648,000 93, , ,000 Shipping expense 89,000 15,000 32,000 42,000 Total variable expenses 737, , , ,000 Contribution margin 1,063, , , ,000 Variable Costs problem 8-24, page 360, handout 1, page 3 52 Part 2 Segment reporting (Topic 8.7) SOLUTION - In s Total S. Eur. Mid.Eur. N.Eur. Sales 1,800, , , ,000 Less variable expenses: Cost of goods sold 648,000 93, , ,000 Shipping expense 89,000 15,000 32,000 42,000 Total variable expenses 737, , , ,000 Contribution margin 1,063, , , ,000 Less traceable fixed exp. Salaries 222,000 54,000 56, ,000 Insurance 39,000 9,000 16,000 14,000 Advertising 590, , , ,000 Depreciation 81,000 21,000 32,000 28,000 Total traceable fixed exp. 932, , , ,000 Territorial seg. margin 131,000 3, ,000 (56,000) Traceable fixed costs problem 8-24, page 360, handout 1, page 3 53 Part 2 Segment reporting (Topic 8.7) SOLUTION - In s Total S. Eur. Mid.Eur. N.Eur. Sales 1,800, , , ,000 Less variable expenses: Cost of goods sold 648,000 93, , ,000 Shipping expense 89,000 15,000 32,000 42,000 Total variable expenses 737, , , ,000 Contribution margin 1,063, , , ,000 Less traceable fixed exp. Salaries 222,000 54,000 56, ,000 Insurance 39,000 9,000 16,000 14,000 Advertising 590, , , ,000 Depreciation 81,000 21,000 32,000 28,000 Total traceable fixed exp. 932, , , ,000 Territorial seg. margin 131,000 3, ,000 (56,000) Less common fixed exp. Advertising (gen.) 90,000 General admin. 60,000 Total common fixed exp. 150,000 Net operating loss (19,000) Common fixed costs problem

19 Part 2 Segment reporting (Topic 8.7) SOLUTION - In s Total S. Eur. Mid.Eur. N.Eur. Sales 1,800, , , ,000 Less variable expenses: Cost of goods sold 648,000 93, , ,000 Shipping expense 89,000 15,000 32,000 42,000 Total variable expenses 737, , , ,000 Contribution margin 1,063, , , ,000 Less traceable fixed exp. Salaries 222,000 54,000 56, ,000 Insurance 39,000 9,000 16,000 14,000 Advertising 590, , , ,000 Depreciation 81,000 21,000 32,000 28,000 Total traceable fixed exp. 932, , , ,000 Territorial seg. margin 131,000 3, ,000 (56,000) Less common fixed exp. Advertising (gen.) 90,000 General admin. 60,000 Total common fixed exp. 150,000 Net operating loss (19,000) Which is covering its traceable costs? problem Part 2 Segment reporting (Topic 8.7) SOLUTION - In s Total S. Eur. Mid.Eur. N.Eur. Sales 1,800, , , ,000 Less variable expenses: Cost of goods sold 648,000 93, , ,000 Shipping expense 89,000 15,000 32,000 42,000 Total variable expenses 737, , , ,000 Contribution margin 1,063, , , ,000 Less traceable fixed exp. Salaries 222,000 54,000 56, ,000 Insurance 39,000 9,000 16,000 14,000 Advertising 590, , , ,000 Depreciation 81,000 21,000 32,000 28,000 Total traceable fixed exp. 932, , , ,000 Territorial seg. margin S. 131,000 Europe 3,000 sales 184,000 are lower (56,000) Less common fixed exp. than mid. Europe, however, Advertising (gen.) salaries 90,000 are comparable. General admin. 60,000 Total common fixed exp. 150, Net operating loss (19,000) problem 8-24 Part 2 Segment reporting (Topic 8.7) SOLUTION - In s Total S. Eur. Mid.Eur. N.Eur. Sales 1,800, , , ,000 Less variable expenses: Cost of goods sold 648,000 93, , ,000 Shipping expense 89,000 15,000 32,000 42,000 Total variable expenses 737, , , ,000 Contribution margin 1,063, , , ,000 Less traceable fixed exp. Salaries 222,000 54,000 56, ,000 Insurance 39,000 9,000 16,000 14,000 Advertising 590, , , ,000 Depreciation 81,000 21,000 32,000 28,000 Total traceable fixed exp. 932, , , ,000 Territorial seg. margin 131,000 3, ,000 (56,000) Less common fixed exp. S. Europe spends less on Advertising (gen.) advertising 90,000 than mid. Europe. General admin. Is this 60,000 a reason for low sales? Total common fixed exp. 150, Net operating loss (19,000) problem

20 Part 2 Segment reporting (Topic 8.7) SOLUTION - In s Total S. Eur. Mid.Eur. N.Eur. Sales 1,800, , , ,000 Less variable expenses: Cost of goods sold 648,000 93, , ,000 Shipping expense 89,000 15,000 32,000 42,000 Total variable expenses 737, , , ,000 Contribution margin 1,063, , , ,000 Less traceable fixed exp. Salaries 222,000 54,000 56, ,000 Insurance 39,000 9,000 16,000 14,000 Advertising 590, , , ,000 Depreciation 81,000 21,000 32,000 28,000 Total traceable fixed exp. 932, , , ,000 Territorial seg. margin 131,000 3, ,000 (56,000) Less common fixed exp. N. Europe spends twice Advertising (gen.) as 90,000 much on sales General admin. salaries 60,000 as Mid. Europe. Total common fixed exp. 150, Net operating loss (19,000) problem 8-24 Part 2 Segment reporting (Topic 8.7) SOLUTION - In s Total S. Eur. Mid.Eur. N.Eur. Sales Less variable expenses: Cost of goods sold Shipping expense Total variable expenses Contribution margin Less traceable fixed exp. Salaries Insurance Advertising Depreciation Total traceable fixed exp Territorial seg. margin (8) Less common fixed exp. Advertising (gen.) 5 General admin. 3 Total common fixed exp. 8 Net operating loss (1) N. Europe s contribution margin is lower. problem Part 2 Segment reporting (Topic 8.7) SOLUTION - In s Total S. Eur. Mid.Eur. N.Eur. Sales N. Europe is not Less variable expenses: Cost of goods covering sold its Shipping traceable expense costs Total variable expenses Contribution margin Less traceable fixed exp. Salaries Insurance Advertising Depreciation Total traceable fixed exp Territorial seg. margin (8) Less common fixed exp. Advertising (gen.) 5 General admin. 3 Total common fixed exp Net operating loss (1) problem

21 MA1 MODULE 8 Part 3 Revenue and marketing expense analysis Topic Part 3 Revenue and marketing expense analysis Analyze s from revenue targets. (Level 1) Static-budget s Flexible budget Sales volume Price Efficiency Stop the audio, and turn in handout 1 to pages 4-7 Mix Yield 62 Part 3 Revenue and marketing expense analysis Analyze s from revenue targets. (Level 1) Static-budget s Flexible budget Sales-volume Sales price Market volume Market share Sales mix Sales quantity 63 21

22 Part 3 Revenue and marketing expense analysis Parker Company sells desks and wall units. The following is the budget and the actual results for the year. Parker Co. Per unit Totals Budget Selling Variable Cont. Sales Sales Contribution price cost margin volume mix margin Desks , % 487,200 Wall units , % 2,907,000 TOTAL 21, % 3,394,200 Parker Co. Per unit Totals Actual Selling Variable Cont. Sales Sales Contribution price cost margin volume mix margin Desks ,000 25% 696,000 Wall units ,000 75% 3,078,000 TOTAL 24, % 3,774,000 Work with unrounded numbers. 64 Part 3 Revenue and marketing expense analysis Static-budget s Flexible budget Sales-volume Sales price Market volume Market share Sales mix Sales quantity 65 Part 3 Revenue and marketing expense analysis 1. Prepare a partial static budget for sales data. Parker Co. - Static budget Actual Static budget Static budget results Desks 1,080, , ,000 F Wall units 5,400,000 5,100, ,000 F TOTAL 6,480,000 5,940, ,000 F How much of the is due to less sales and how much of it is due to a change in selling price? 66 22

23 Part 3 Revenue and marketing expense analysis Static-budget s Flexible budget Sales-volume Sales price Market volume Market share Sales mix Sales quantity 67 Part 3 Revenue and marketing expense analysis 2. Prepare a partial flexible budget for sales data. Parker Co. Sales price and sales volume s Actual results Sales price Flexible budget Static budget Desks 1,080,000 1,200, ,000 Wall units 5,400,000 5,400,000 5,100,000 TOTAL 6,480,000 6,600,000 5,940,000 Bud.sell.price Act.units Desks $200 x 6,000 = $1,200,000 Wall units $300 x 18,000 = $5,400, Part 3 Revenue and marketing expense analysis 2. Prepare a partial flexible budget for sales data. Parker Co. Sales price and sales volume s Actual Sales Flexible Static results price budget budget Desks 1,080, ,000 U 1,200, ,000 Wall units 5,400, ,400,000 5,100,000 TOTAL 6,480, ,000 U 6,600,000 5,940,000 Sales price 69 23

24 Part 3 Revenue and marketing expense analysis 2. Prepare a partial flexible budget for sales data. Parker Co. Sales price and sales volume s Actual Sales Flexible Static results price budget budget Desks 1,080, ,000 U 1,200, ,000 F 840,000 Wall units 5,400, ,400, ,000 F 5,100,000 TOTAL 6,480, ,000 U 6,600, ,000 F 5,940,000 When based on the contribution margin, this is called the Sales volume. This next analysis will be based on contribution margin 70 Part 3 Revenue and marketing expense analysis 3. Prepare the sales mix and sales quantity s Parker Co. Sales price and sales volume s Actual Sales Flexible Static results price budget budget Desks 1,080, ,000 U 1,200, ,000 F 840,000 Wall units 5,400, ,400, ,000 F 5,100,000 TOTAL 6,480, ,000 U 6,600, ,000 F 5,940,000 Based on contribution margin: Act.sls. CM Desks: 6,000 x $116 = $ 696,000 Wall units: 18,000 x $171 = $3,078,000 TOTAL $3,774,000 $3,394, Part 3 Revenue and marketing expense analysis 3. Prepare the sales mix and sales quantity s Parker Co. Sales price and sales volume s Flexible budget Sales volume Static budget Desks 696, ,800 F 487,200 Wall units 3,078, ,000 F 2,907,000 TOTAL 3,774, ,800 F 3,394,

25 Part 3 Revenue and marketing expense analysis Static-budget s Flexible budget Sales-volume Sales price Market volume Market share Sales mix Sales quantity 73 Part 3 Revenue and marketing expense analysis Market volume Change in contribution margin due to change in total market sales. Market share Change in contribution margin due to change in the share of market sales. Sales mix Change in contribution margin due to change in the proportion of sales that each product contributes. Sales quantity Change in contribution margin due to either more or less sales than budgeted. 74 Part 3 Revenue and marketing expense analysis 3. Prepare the sales mix and sales quantity s Parker Co. Analysis of the sales volume Bud. Flexible Sales Act.qty. Sales Static mix budget mix x bud.sls. quantity budget % mix x CM Desks * , , ,200 Wall *80.2 3,078,000 3,290,943 2,907,000 units TOTAL 3,774,000 3,842,490 3,394,200 * rounded Desks: 24,000 x (42/212) x $116= $ 551,547 Wall units 24,000 x (170/212) x $171 = $3,290,943 Work with unrounded numbers

26 Part 3 Revenue and marketing expense analysis 3. Prepare the sales mix and sales quantity s Parker Co. Analysis of the sales volume Act. Bud. Flexible Sales Act.qty. Sales Static mix mix budget mix x bud.sls. mix x CM quantity budget Desks 25 * , ,453F 551,547 64,347F 487,200 Wall units 75 *80.2 3,078, ,943U 3,290, ,943F 2,907,000 TOTAL 3,774,000 68,490U 3,842, ,290F 3,394,200 * rounded For desks the actual sales mix is % more than the budgeted sales mix. 24,000 total units x % x CM of $116 per unit is $144, Part 3 Revenue and marketing expense analysis 3. Prepare the sales mix and sales quantity s Parker Co. Analysis of the sales volume Act. Bud. Flexible Sales Act.qty. Sales Static mix mix budget mix x bud.sls. mix x CM quantity budget Desks 25 * , ,453F 551,547 64,347F 487,200 Wall units 75 *80.2 3,078, ,943U 3,290, ,943F 2,907,000 TOTAL 3,774,000 68,490U 3,842, ,290F 3,394,200 * rounded In total 2,800 more units were sold (24,000-21,200). Of that amount % were desks. At a contribution margin level of $116 that represents a 2,800 x x $116 = $64,347 favorable for desks. 77 Part 3 Revenue and marketing expense analysis 3. Prepare the sales mix and sales quantity s Parker Co. Analysis of the sales volume Act. Bud. Flexible Sales Act.qty. Sales Static mix mix budget mix x bud.sls. mix x CM quantity budget Desks 25 * , ,453F 551,547 64,347F 487,200 Wall units 75 *80.2 3,078, ,943U 3,290, ,943F 2,907,000 TOTAL 3,774,000 68,490U 3,842, ,290F 3,394,200 * rounded See page 535 in the textbook for an alternative method

27 Part 3 Revenue and marketing expense analysis Static-budget s Flexible budget Sales-volume Sales price Market volume Market share Sales mix Sales quantity 79 Part 3 Revenue and marketing expense analysis Assume that Parker Co. derives its total unit sales budget for the year based on industry forecasts. 4. Prepare the market volume and market share s Parker Co. - Analysis of the sales volume Industry Actual Variance forecast industry (units) in units results in units Desks 48,000 60,000 12,000F Wall 85, ,000 15,000F units Total 133, ,000 27,000F 80 Part 3 Revenue and marketing expense analysis Assume that Parker Co. derives its total unit sales budget for the year based on industry forecasts. 4. Prepare the market volume and market share s Parker Co. - Analysis of the sales volume Industry Actual Variance Market forecast in units industry results in units (units) volume Desks 48,000 60,000 12,000F 121,800F Wall 85, ,000 15,000F 513,000F units Total 133, ,000 27,000F 634,800F (Act.mkt.vol.-bud.mkt.vol.) x Ant.mkt sh.% x Bud. CM Desks: ( 60,000-48,000 ) x ( 4200/48,000) x 116 Wall units: ( 100,000-85,000 ) x (17000/85000) x

28 Part 3 Revenue and marketing expense analysis Assume that Parker Co. derives its total unit sales budget for the year based on industry forecasts. 4. Prepare the market volume and market share s Parker Co. - Analysis of the sales volume Industry Actual Variance Market forecast in units industry results in units (units) volume Desks 48,000 60,000 12,000F 121,800F Wall 85, ,000 15,000F 513,000F units Total 133, ,000 27,000F 634,800F The total market size for desks has increased by 60,000-48,000=12,000 units Parker s share of this is 8.75% (4200/48,000). That s 1050 units 1050 units x CM of $116 is $121,800 which means that Parker s share of the increase in the market size is $121, Part 3 Revenue and marketing expense analysis Assume that Parker Co. derives its total unit sales budget for the year based on industry forecasts. 4. Prepare the market volume and market share s Parker Co. - Analysis of the sales volume Industry Actual Variance Market Market TOTAL forecast in units industry results in units (units) volume share Desks 48,000 60,000 12,000F 121,800F 87,000F 208,800F Wall 85, ,000 15,000F 513,000F 342,000U 171,000F units Total 133, ,000 27,000F 634,800F 255,000U 379,800F (Act.sls qty.- [Act.mkt.vol. x Ant.mkt sh.%]) x Bud. CM Desks: ( 6,000 - [ 60,000 x 4200 / 48000]) x 116 Wall units: ( 18,000 - [ 100,000 x 17000/ 85000]) x Part 3 Revenue and marketing expense analysis Assume that Parker Co. derives its total unit sales budget for the year based on industry forecasts. 4. Prepare the market volume and market share s Parker Co. - Analysis of the sales volume Industry Actual Variance Market Market TOTAL forecast in units industry results in units (units) volume share Desks 48,000 60,000 12,000F 121,800F 87,000F 208,800F Wall 85, ,000 15,000F 513,000F 342,000U 171,000F units Total 133, ,000 27,000F 634,800F 255,000U 379,800F Parker s original forecast of 4200 units was 8.75% of the market. At a market level of 60,000 units they should have sold (60,000x8.75%) 5,250 units to maintain their market share. Instead they sold 6000 units. The increase of 750 units x $116 CM is $87,000 which is their increase in the share of the market for desks

29 Part 3 Revenue and marketing expense analysis Assume that Parker Co. derives its total unit sales budget for the year based on industry forecasts. 4. Prepare the market volume and market share s Parker Co. - Analysis of the sales volume Industry Actual Variance Market Market TOTAL forecast in units industry results in units (units) volume share Desks 48,000 60,000 12,000F 121,800F 87,000F 208,800F Wall 85, ,000 15,000F 513,000F 342,000U 171,000F units Total 133, ,000 27,000F 634,800F 255,000U 379,800F $379,800 is the original sales volume. 85 MA1 MODULE 8 Part 4 Rate of return and residual income Balanced scorecard Other performance measures Topics Part 4 Rate of return and residual income (Topic 8.9) Compute and interpret the return on investment and residual income and list the strengths and weaknesses of each method. (Level 1) Measuring performance of investment centres Return on investment (ROI) Net operating income Sales x Sales Average operating assets Margin Turnover p

30 Part 4 Rate of return and residual income (Topic 8.9) Compute and interpret the return on investment and residual income and list the strengths and weaknesses of each method. (Level 1) Measuring performance of investment centres Return on investment (ROI) Net operating income Sales x Sales Average operating assets Margin Management s ability to control expenses in relation to sales. Turnover p Part 4 Rate of return and residual income (Topic 8.9) Compute and interpret the return on investment and residual income and list the strengths and weaknesses of each method. (Level 1) Measuring performance of investment centres Return on investment (ROI) Net operating income Sales x Sales Average operating assets Margin Turnover Amount of sales generated by the investment in assets. p Part 4 Rate of return and residual income (Topic 8.9) Compute and interpret the return on investment and residual income and list the strengths and weaknesses of each method. (Level 1) Measuring performance of investment centres Return on investment (ROI) Advantages Percentages are easy to understand and compare with other divisions/companies. Forces control of investments in assets and costs. Includes major ingredients of profitability. Disadvantages May encourage short run increases in ROI or changes that are inconsistent with strategies. A manager may not be able to control committed costs. Ignores product quality. May reject profitable investment opportunities to p maximize ROI

31 Part 4 Rate of return and residual income (Topic 8.9) Compute and interpret the return on investment and residual income and list the strengths and weaknesses of each method. (Level 1) Measuring performance of investment centres Residual income Net operating income (minimum required return on investments) % return x average investments Deducting the minimum required return leaves the residual income available for investments. p Part 4 Rate of return and residual income (Topic 8.9) Compute and interpret the return on investment and residual income and list the strengths and weaknesses of each method. (Level 1) Measuring performance of investment centres Residual income Advantages Includes major ingredients of profitability. Encourages managers to make investments that are profitable to the entire organization. Disadvantages May encourage short run increases in RI. Cannot compare with different size segments. Not normally used by external analysts. p Part 4 Rate of return and residual income (Topic 8.9) Measuring performance of investment centres ROI APPROACH Present New line Total Sales 21,000,000 Net operating income 1,680,000 Operating assets 5,250,000 ROI (margin x turnover) 32% (1,680,000/21,000,000) x (21,000,000/5,250,000) (net operating income/sales) x (sales/average operating assets) 1. Compute the division s ROI for last year, also, compute the ROI as it will appear if the new product line is added. Stop the audio, turn to page 548, problem in the textbook and page 8 of handout1. p

32 Part 4 Rate of return and residual income (Topic 8.9) Measuring performance of investment centres ROI APPROACH Present New line Total Sales 21,000,000 9,000,000 Net operating income 1,680, ,000* Operating assets 5,250,000 3,000,000 ROI (margin x turnover) 32% 21% (630,000/9,000,000) x (9,000,000/3,000,000) (net operating income/sales) x (sales/average operating assets) *(9,000,000-(65% of 9,000,000)-2,520,000) 1. Compute the division s ROI for last year, also, compute the ROI as it will appear if the new product line is added. Problem 11-20, page p Part 4 Rate of return and residual income (Topic 8.9) Measuring performance of investment centres ROI APPROACH Present New line Total Sales 21,000,000 9,000,000 30,000,000 Net operating income 1,680, ,000 2,310,000 Operating assets 5,250,000 3,000,000 8,250,000 ROI (margin x turnover) 32% 21% 28% (2,310,000/30,000,000) x (30,000,000/8,250,000) (net operating income/sales) x (sales/average operating assets) 1. Compute the division s ROI for last year, also, compute the ROI as it will appear if the new product line is added. Problem 11-20, page p Part 4 Rate of return and residual income (Topic 8.9) Measuring performance of investment centres ROI APPROACH Present New line Total Sales 21,000,000 9,000,000 30,000,000 Net operating income 1,680, ,000 2,310,000 Operating assets 5,250,000 3,000,000 8,250,000 ROI (margin x turnover) 32% 21% 28% 2. Fred has no incentive to accept the investment if it will reduce his ROI from 32% to 28%. 3. It will increase the company s overall ROI of 18%. Problem 11-20, page p

33 Part 4 Rate of return and residual income (Topic 8.9) Measuring performance of investment centres RESIDUAL INCOME APPROACH Present New line Total Net operating income $1,680,000 Minimum net operating income 787,500 Residual income $ 892,500 Operating assets x minimum rate of return (5,250,000 x 15%) 4. a. Compute the East Division s residual income for last year, also compute the residual income as it will appear if the new product line is added. Problem 11-20, page p Part 4 Rate of return and residual income (Topic 8.9) Measuring performance of investment centres RESIDUAL INCOME APPROACH Present New line Total Net operating income $1,680,000 $ 630,000 Minimum net operating income 787, ,000 Residual income $ 892,500 $ 180,000 Operating assets x minimum rate of return (3,000,000 x 15%) 4. a. Compute the East Division s residual income for last year, also compute the residual income as it will appear if the new product line is added. Problem 11-20, page p Part 4 Rate of return and residual income (Topic 8.9) Measuring performance of investment centres RESIDUAL INCOME APPROACH Present New line Total Net operating income $1,680,000 $ 630,000 $2,310,000 Minimum net operating income 787, ,000 1,237,500 Residual income $ 892,500 $ 180,000 $1,072,500 Operating assets x minimum rate of return (8,250,000 x 15%) 4. a. Compute the East Division s residual income for last year, also compute the residual income as it will appear if the new product line is added. Problem 11-20, page p

34 Part 4 Rate of return and residual income (Topic 8.9) Measuring performance of investment centres RESIDUAL INCOME APPROACH Present New line Total Net operating income $1,680,000 $ 630,000 $2,310,000 Minimum net operating income 787, ,000 1,237,500 Residual income $ 892,500 $ 180,000 $1,072,500 4.b. Using this approach, Fred is inclined to accept the project because it will increase the East Division s residual income. Problem 12-18, page 594 p Part 4 Balanced scorecard (Topic 8.10) List some operating performance measures and explain how they are used. (Level 1) An integrated set of performance measures that supports the organization s strategy Financial Internal business processes Performance measures Customers Learning and growth p McGraw-Hill Ryerson Limited., Part 4 Balanced scorecard (Topic 8.10) List some operating performance measures and explain how they are used. (Level 1) How do we An integrated set of performance look to the measures that supports the owners? organization s strategy Financial Internal business processes Return on investment Net Performance income measures Customers Learning and growth p McGraw-Hill Ryerson Limited.,

35 Part 4 Balanced scorecard (Topic 8.10) List some operating performance measures and explain how they are used. (Level 1) An integrated set of performance How do we measures that supports the look to our organization s strategy customers? Financial Internal business processes Market share New Performance customers Customer measures complaints Customers Learning and growth p McGraw-Hill Ryerson Limited., Part 4 Balanced scorecard (Topic 8.10) List some operating performance measures and explain how they are used. (Level 1) An integrated set of performance measures that supports the organization s strategy Financial Internal business processes Hours of in-house training Suggestions Performance per employee Employee measures turnover How can we continually learn, improve, Customers and grow? Learning and growth p McGraw-Hill Ryerson Limited., Part 4 Balanced scorecard (Topic 8.10) List some operating performance measures and explain how they are used. (Level 1) In which internal business processes must Financial we excel? Internal business processes An integrated set of performance measures that supports the organization s strategy Time to introduce new products Performance Delivery measures cycle time Standard cost s Customers Learning and growth p McGraw-Hill Ryerson Limited.,

36 Part 4 Other performance measures (Topic 8.11) Calculate delivery cycle time, the throughput time, and manufacturing cycle efficiency. (Level 1) Measures of internal process performance Delivery cycle time Time from receipt of order from customer to delivery of product. (wait time + throughput time) Throughput time (manufacturing cycle time) Process time + inspection time + move time + queue time Only process time adds value Manufacturing cycle efficiency Value added time/throughput time. <1 means non-value added time is present. p Part 4 Other performance measures (Topic 8.11) Calculate delivery cycle time, the throughput time, and manufacturing cycle efficiency. (Level 1) Measures of internal process performance Delivery cycle time Time from receipt of order from customer to delivery of product. (wait time + throughput time) Throughput time (manufacturing cycle time) Process time + inspection time + move time + queue time Only process time adds value Manufacturing cycle efficiency Value added time/throughput time. <1 means non-value added time is present. p Part 4 Other performance measures (Topic 8.11) Calculate delivery cycle time, the throughput time, and manufacturing cycle efficiency. (Level 1) Measures of internal process performance Delivery cycle time Time from receipt of order from customer to delivery of product. (wait time + throughput time) Throughput time (manufacturing cycle time) Process time + inspection time + move time + queue time Only process time adds value. Manufacturing cycle efficiency Value added time/throughput time. <1 means non-value added time is present. p

37 MA1 MODULE 8 Part 5 Review question: Variance analysis and journal entries (download the additional questions handout: ma1_mod7_handout1.pdf) 109 Part 5 Review question: Variance analysis and journal entries Past CGA exam question Handout pages 9 thru 10 a. What amounts would be debited to work in process for materials and labour? b. What would be the entry to record the materials quantity? c. Calculate total direct labour cost. Identify and calculate the two components of this total labour. Stop the audio, read and attempt the question in the handout then come back to listen to the solution. 110 Part 5 Review question: Variance analysis and journal entries Past CGA exam question Handout pages 9 thru 10 a. What amounts would be debited to work in process for materials and labour? b. What would be the entry to record the materials quantity? c. Calculate total direct labour cost. Identify and calculate the two components of this total labour

38 Part 5 Review question: Variance analysis and journal entries Past CGA exam question Handout pages 9 thru 10 a. What amounts would be debited to work in process for materials and labour? b. What would be the entry to record the materials quantity? c. Calculate total direct labour cost. Identify and calculate the two components of this total labour. 112 Part 5 Review question: Variance analysis and journal entries Past CGA exam question Handout pages 9 thru 10 a. What amounts would be debited to work in process for materials and labour? b. What would be the entry to record the materials quantity? c. Calculate total direct labour cost. Identify and calculate the two components of this total labour. 113 MA1 MODULE 8 Part 6 Review question: Variance analysis working backward from data (download the additional questions handout: ma1_mod8_handout1.pdf)

39 Part 6 Review question: Variance analysis working backward from data Case pages Handout page How many units were produced last period? 2. How many kilograms of direct materials were purchased and used in production? 3. What was the actual cost per kilogram of direct material? Stop the audio, read and attempt the question in the textbook then come back to listen to the solution. 115 Part 6 Review question: Variance analysis working backward from data Case pages Handout page How many actual direct labour hours were worked during the period? 5. What was the actual rate per direct labour hour? 6. How much actual variable manufacturing overhead cost was incurred during the period? 7. What is the total fixed manufacturing overhead cost in the company s flexible budget? 8. What were the denominator direct labour hours for last period? 116 MA1 MODULE 8 Part 7 Review question: Segmented statements; Product-line analysis (download the additional questions handout: ma1_mod8_handout1.pdf)

40 Part 7 Review question: Segmented statements Problem 8-27 pages Handout pages 12 and Prepare a contribution format segmented income statement for the leather division. 2. Prepare a contribution format segmented income statement for the handbag division. 3. Which product line should be the focus of the advertising campaign? Stop the audio, read and attempt the question in the textbook then come back to listen to the solution. 118 Part 7 Review question: Segmented statements Problem 8-27 pages Handout pages 12 and Prepare a contribution format segmented income statement for the leather division. 2. Prepare a contribution format segmented income statement for the handbag division. 3. Which product line should be the focus of the advertising campaign? 119 Part 7 Review question: Segmented statements Problem 8-27 pages Handout pages 12 and Prepare a contribution format segmented income statement for the leather division. 2. Prepare a contribution format segmented income statement for the handbag division. 3. Which product line should be the focus of the advertising campaign?