Podcast
Questions and Answers
What is the primary focus of a performance report in a profit entity?
What is the primary focus of a performance report in a profit entity?
- Optimize budget goals
- Evaluate management by exception
- Minimize cost of providing services
- Maximize net income (correct)
What is a controllable cost?
What is a controllable cost?
- A cost that can be controlled by top management
- A cost that is allocated to a responsibility level
- A cost that can be controlled by any manager
- A cost over which a manager has control (correct)
Why are exception guidelines more restrictive for controllable items?
Why are exception guidelines more restrictive for controllable items?
- Because they are directly related to budget goals
- Because top management focuses on them
- Because they are directly controllable by the manager (correct)
- Because they are more material
What is the primary purpose of management by exception?
What is the primary purpose of management by exception?
What is the principle of performance evaluation that states that managers should have direct input into establishing budget goals?
What is the principle of performance evaluation that states that managers should have direct input into establishing budget goals?
What type of costs are incurred indirectly and allocated to a responsibility level?
What type of costs are incurred indirectly and allocated to a responsibility level?
What is the primary purpose of a performance report in a not-for-profit entity?
What is the primary purpose of a performance report in a not-for-profit entity?
Why is it important to establish a materiality threshold in management by exception?
Why is it important to establish a materiality threshold in management by exception?
Under responsibility accounting, what is the basis for evaluating a manager's performance?
Under responsibility accounting, what is the basis for evaluating a manager's performance?
What type of costs are typically included in responsibility reports for cost centers?
What type of costs are typically included in responsibility reports for cost centers?
What type of costs are considered traceable costs?
What type of costs are considered traceable costs?
Which type of responsibility center is evaluated based on controllable revenues and controllable costs?
Which type of responsibility center is evaluated based on controllable revenues and controllable costs?
What is the focus of responsibility accounting for cost centers?
What is the focus of responsibility accounting for cost centers?
Which of the following is a characteristic of direct fixed costs?
Which of the following is a characteristic of direct fixed costs?
What type of costs are most likely to be controllable by a profit center manager?
What type of costs are most likely to be controllable by a profit center manager?
Under responsibility accounting, what is the primary focus of evaluating a manager's performance?
Under responsibility accounting, what is the primary focus of evaluating a manager's performance?
What is a key principle of evaluation in a responsibility reporting system?
What is a key principle of evaluation in a responsibility reporting system?
What type of data should be included in a report according to the reporting principles?
What type of data should be included in a report according to the reporting principles?
What is the purpose of highlighting significant differences between actual results and budget goals?
What is the purpose of highlighting significant differences between actual results and budget goals?
How often should reports be prepared according to the reporting principles?
How often should reports be prepared according to the reporting principles?
What is the purpose of a responsibility reporting system?
What is the purpose of a responsibility reporting system?
How does a responsibility reporting system permit management by exception?
How does a responsibility reporting system permit management by exception?
What is the flow of reporting in a responsibility reporting system?
What is the flow of reporting in a responsibility reporting system?
What is the purpose of Report A in the partial organization chart?
What is the purpose of Report A in the partial organization chart?
What is the formula for Return on Investment (ROI)?
What is the formula for Return on Investment (ROI)?
What is included in operating assets?
What is included in operating assets?
How are average operating assets calculated?
How are average operating assets calculated?
What is the ROI of the investment if controllable margin is $1,000,000 and average operating assets are $5,000,000?
What is the ROI of the investment if controllable margin is $1,000,000 and average operating assets are $5,000,000?
What is the purpose of the Balanced Scorecard?
What is the purpose of the Balanced Scorecard?
What is the factor that represents the profitability of an investment in the ROI formula?
What is the factor that represents the profitability of an investment in the ROI formula?
What is the term for the assets used in operations and controlled by a manager?
What is the term for the assets used in operations and controlled by a manager?
What is the learning objective that discusses the Balanced Scorecard?
What is the learning objective that discusses the Balanced Scorecard?
Which perspective of the Balanced Scorecard focuses on measures such as return on assets and net income?
Which perspective of the Balanced Scorecard focuses on measures such as return on assets and net income?
What is the objective 'Percentage of customers who would recommend product' a measure of in the Balanced Scorecard?
What is the objective 'Percentage of customers who would recommend product' a measure of in the Balanced Scorecard?
Which of the following is an objective used in the Internal Process perspective of the Balanced Scorecard?
Which of the following is an objective used in the Internal Process perspective of the Balanced Scorecard?
What is the objective 'Training hours' a measure of in the Balanced Scorecard?
What is the objective 'Training hours' a measure of in the Balanced Scorecard?
Which of the following is NOT an objective used in the Learning and Growth perspective of the Balanced Scorecard?
Which of the following is NOT an objective used in the Learning and Growth perspective of the Balanced Scorecard?
What is the objective 'Stockouts' a measure of in the Balanced Scorecard?
What is the objective 'Stockouts' a measure of in the Balanced Scorecard?
Which perspective of the Balanced Scorecard focuses on measures such as customer retention and brand recognition?
Which perspective of the Balanced Scorecard focuses on measures such as customer retention and brand recognition?
What is the objective 'Profit per employee' a measure of in the Balanced Scorecard?
What is the objective 'Profit per employee' a measure of in the Balanced Scorecard?
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Study Notes
Performance Evaluation
- Emphasizes controllable costs and relevant data for performance reports
- Applies to both profit and not-for-profit entities
- Profit entities: maximize net income
- Not-for-profit: minimize cost of providing services
Controllable versus Noncontrollable Costs
- Controllable costs: costs over which a manager has control
- Top management controls all costs, but fewer costs are controllable as one moves down to each lower level of managerial responsibility
- Noncontrollable costs: costs incurred indirectly and allocated to a responsibility level
Principles of Performance Evaluation
- Management function that compares actual results with budget goals
- Includes both behavioral and reporting principles
- Behavioral principles:
- Managers should have direct input into establishing budget goals
- Performance evaluation should be based entirely on controllable matters
- Top management should support the evaluation process
- The evaluation process must allow managers to respond to their evaluations
- Evaluations should identify both good and poor performance
- Reporting principles:
- Contain only data 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
- Be tailor-made for intended evaluation by ensuring only controllable costs are included
- Be prepared at reasonable time intervals
Responsibility Reporting System
- Preparation of a report for each level of responsibility in the company's organization chart
- Begins with the lowest level of responsibility and moves upward to higher levels
- Permits management by exception at each level of responsibility
- Each higher level can obtain detailed reports for each lower level
Types of Responsibility Centers
- Cost Centers: based on manager's ability to meet budgeted goals for controllable costs
- Profit Centers: based on detailed information about both controllable revenues and controllable costs
- Direct fixed costs: relate specifically to one responsibility center, incurred for the sole benefit of the center, and are usually controllable by the profit center manager
Return on Investment (ROI)
- ROI formula: controllable margin ÷ average operating assets
- Controllable margin: revenue minus controllable costs
- Average operating assets: average of beginning and ending balances of operating assets
Balanced Scorecard
- A framework for performance evaluation that includes four perspectives:
- Financial
- Customer
- Internal Process
- Learning and Growth
- Examples of objectives within each perspective:
- Financial: return on assets, net income, credit rating
- Customer: customer retention, response time per customer request, brand recognition
- Internal Process: percentage of defect-free products, stockouts, labor utilization rates
- Learning and Growth: percentage of employees leaving in less than one year, number of cross-trained employees
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