Chapter 14 SCM

Chapter 14
MANAGEMENT CONTROL AND

STRATEGIC PERFORMANCE
MEASUREMENT
ABALOS, MA. ARVEE

MORRISON, KASSANDRA AEDRIELLE
SCM
Responsibility Accounting
and Responsibility
Centers
Responsibility Accounting is a system used
by top management to evaluate
responsibility center managers.
Responsibility Centers are specific unit of

an organization assigned to a manager
who is held accountable for its operations
and centers.
STRATEGIC BUSINESS UNITS
(Responsibility Centers)
COST REVENUE PROFIT INVESTMENT
SBU SBU SBU SBU
Minimize costs Control revenue,

Generate sales based
subject to some Generate revenue cost, and
RESPONSIBILITY output
on budgeted
and control costs. investments made
quantities and price.
constraints. in that SBU.
Variance Analysis Return on

Sales Price Variance Investment
Variance Variance Analysis (ROI)
EVALUATION Comparative
Analysis Sales Volume Economic Value
Variance Performance Added (EVA)
Sales Mix Variance Residual Income
COST SBU
This is a unit within the organization wherein the manager is responsible
for minimizing costs subject to some output constraints. A distinguishing
feature of a cost SBU is that it has no control over generating revenue or
the use of investment funds.
Performance of a cost SBU is evaluated using the performance reports or

variance analysis reports based on standard costs and flexible budget.
The performance or responsibility cost report will show the comparison
between the actual costs incurred and the budgeted costs. The difference
between the two costs if any, referred to as the variance will be reported
and if significant, will be analyzed.
COST SBU
The department supervisors at Meredith, Inc. are authorized to purchase the direct and indirect materials
needed in production, hire and assign the production workers, and incur various overhead costs for their
department. The equipment used in the department is acquired at a higher management level, but
supervisors are responsible for proper care and maintenance. The salaries of the supervisors are shown
under the cost of supervision.
Required:
1. Compute the budgeted unit

cost of the product and
actual unit cost.
2. Prepare a responsibility cost
report. Show cost variations
from the budget.
3. Does it appear that the
supervisor was responsible
for a large part of the
variation between budgeted
and actual costs?
Required:
1. Compute the budgeted unit cost of the product and actual unit cost.
Required:
2. Prepare a responsibility cost
report. Show cost variations
from the budget.
Required:
3. Does it appear that the supervisor was responsible for a large part of
the variation between budgeted and actual costs?
PROFIT SBU
This is a unit or segment within the organization wherein the
manager is responsible for the generation of revenues and control of
costs incurred in that SBU.
Performance of a profit SBU is measured by preparing the income

statements using the contribution approach, presenting both the
actual results and budgeted figures. The statement will show the
comparative revenue, direct costs, and the profit SBU's contribution to
indirect costs. The operating performance of the profit SBU is
generally considered satisfactory if it is able to generate or even
exceed the expected contribution to indirect costs or common costs
of the company.
Required:
1. List the costs by division that can be directly attributed to that division.
2. Do all three divisions provide an amount over their direct costs to the total operation?
Identify any division that does not.
3. Is there any division that covers direct costs but does not bear its full share of costs of
the total operations? identify that division, if any.
4. Which division(s) can bear all of its share of the allocated cost?
REVENUE SBU
This is a unit or segment within an organization where the manager is
responsible for selling budgeted quantities of various products or
services at budgeted price.
Managers of revenue SBUs use variance in sales price and sales mix
to monitor or control their operations. Managers of revenue SBUs are
responsible for achieving budgeted levels of contribution margin by
controlling the number of units sold, product mix, and selling prices.
REVENUE SBU
(Actual Sales Price - Master Budget Sales Price)
SALES PRICE VARIANCE
x Actual Units Sold
(Actual Units Sold - Master Budget Unit Sales) x

SALES VOLUME VARIANCE

Master Budget Average Contribution Margin per

Unit
(Flexible Budget Average CMU -Master Budget

SALES MIX VARIANCE
Average CMU) x Actual Units Sold
REVENUE
SBU
REVENUE SBU
REVENUE SBU
REVENUE SBU
INVESTMENT SBU
This is a unit or segment within the organization where the manager
is responsible for the control of revenues, costs, and investments
made in that SBU.
The objectives of an investment SBU or business unit are:

motivate managers to exert a high level of effort to achieve the goals
of the firm.
provide the right incentive for managers to make decisions that are
consistent with the goals of top management.
determine fairly the rewards earned by the managers for their effort
and skill.
INVESTMENT SBU
Net Operating Income / Average Operating Assets

RETURN ON Net Operating Income / Sales x Sales / Average Operating
INVESTMENT (ROI) Assets
Operating Profit Margin x Asset Turnover (Return on Sales)
RESIDUAL INCOME Operating Income - Minimum Required Income
ECONOMIC VALUE
Operating Income - Cost of Capital
ADDED (EVA)
Illustrative Problem 14-6: INVESTMENT SBU
Case 1. MNO, division of Aeon Manufacturing, has assets of P450,000 and an

operating income of P110,000.
a. What is the division's ROI?
b. If the minimum rate of return is 12%, what is the division's residual income?
Return on
Operating Income / Total Assets

Investment (ROI) P110,000/P450,000 = 24.22%
Operating Income - Minimum required return

Residual Income P110,000 - (12% x 450,000)
P110,000 - 54,000 = 56,000
TRANSFER PRICE
The price charged when one segment of a company provides goods or
services to another segment of the company.
Alternative Transfer Price

Minimum Transfer Price
Market-Based Transfer Price
Cost-Based Transfer Price
Variable Cost
Full Cost
Alternative Cost Measures
Negotiated Transfer Price
MINIMUM TRANSFER MARKET BASED -
COST BASED TRANSFER PRICE NEGOTIATED PRICE
PRICE TRANSFER PRICE
Minimum transfer price is

typically used in situations
where a company has excess Variable Cost Transfer Price -
capacity in one division or unit consider the differential cost only
and wants to utilize it by (but may include change in fixed
transferring goods or services Price at which the cost)
to another division or unit. goods are sold on the
TRANSFER PRICE is calculated

open market.

by adding Differential cost to If the selling division

Full Cost Transfer Price - includes
actual manufacturing costs (V & F)
plus portion of marketing and
Managers are permitted
to negotiate the price
Lost CM or Opportunity Cost has NO idle capacity, administrative costs. for internally transferred
the market price in the goods and services.
If the selling division has outside market is the Alternative Cost Measures
sufficient idle capacity, then it perfect choice for the Full absorption Cost - includes
does not have opportunity transfer price. manufacturing cost only (V & F)
costs. Cost Plus - Variable Cost or Full

Absorption cost + markup

Illustrative Problem 14-8:

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YOU!

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Chapter 14

MANAGEMENT CONTROL AND

ABALOS, MA. ARVEE

Responsibility Centers are specific unit of

Minimize costs Control revenue,

Variance Analysis Return on

Performance of a cost SBU is evaluated using the performance reports or

Performance of a profit SBU is measured by preparing the income

(Actual Units Sold - Master Budget Unit Sales) x

Master Budget Average Contribution Margin per

(Flexible Budget Average CMU -Master Budget

The objectives of an investment SBU or business unit are:

Net Operating Income / Average Operating Assets

RESIDUAL INCOME Operating Income - Minimum Required Income

Case 1. MNO, division of Aeon Manufacturing, has assets of P450,000 and an

Operating Income / Total Assets

Operating Income - Minimum required return

Alternative Transfer Price

Minimum transfer price is

TRANSFER PRICE is calculated

by adding Differential cost to If the selling division

Illustrative Problem 14-8:

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