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chapter 22
Tools for Enterprise
Performance Evaluation
goals discussion goals achievement fill in the blanks multiple choice problems check list and key terms
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review and check-off each noted item to be certain that important concepts have not been overlooked in your study.
Differentiate between centralized and decentralized decision making business structures.
Define responsibility centers and concepts of responsibility accounting.
Distinguish between cost centers, profit centers, and investment centers.
How is return on investment (ROI) calculated?
What is a performance report and how does it align with units of responsibility?
Define controllable fixed costs.
Define common fixed costs.
Define the concept of management by exception.
Differentiate between a flexible budget and a static budget.
Be able to construct a flexible budget, and demonstrate how this interfaces with performance evaluation.
What is a standard cost, and how is it determined?
Discuss considerations necessary in the establishment of standards.
Describe different levels of standards and the pros and cons of each.
What is a variance?
Be able to calculate and explain material, labor, and overhead variances.
When should variances be investigated?
Describe the balanced scorecard concept of performance evaluation.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
| achievable standards | A standard that takes into account normal spoilage and inefficiency; intended to allow workers to reach the established benchmarks |
| balanced scorecard | A set of performance measures that are congruent with assessing improvement in financial, customer, and business process outcomes |
| centralized decision making | A business style where top leaders make and direct most important decisions |
| common fixed costs | Fixed costs that are incurred to support more than one business unit |
| cost center | An area of responsibility under the control of a manager who is responsible for costs incurred within the unit; the unit generally has little revenue function |
| decentralized decision making | A business style where top leaders concentrates on strategy, and leaves day-to-day operation and decision-making tasks to lower-level personnel |
| direct labor efficiency variance | A variance comparing standard hours of direct labor to the actual hours worked; measured at the standard rate per hour [(standard hours - actual hours) X standard rate] |
| direct labor rate variance | A variance that reveals the difference between the standard rate and actual rate for the actual labor hours worked [(standard rate - actual rate) X actual hours] |
| fixed overhead spending variance | A fixed overhead variance that compares actual fixed overhead to the budgeted fixed overhead |
| fixed overhead volume variance | A fixed overhead variance that compares the budgeted fixed overhead to the fixed overhead that is applied to production based on standard fixed overhead per unit of output |
| ideal standards | A standard that could only be achieved under perfect operating conditions; such standards are rarely expected to be achieved |
| investment center | A evaluative unit where managers are accountable for cost and profit outcomes, including consideration of the amount of capital that is deployed to achieve those outcomes |
| management by exception | A management focus of attention on areas where corrective measures appear necessary |
| materials price variance | A variance that reveals the difference between standard price for materials purchased and amounts actually paid for those materials [(standard price - actual price) X actual quantity]. |
| materials quantity variance | A variance comparing standard quantity to actual quantity of materials; variation is measured at the standard price per unit [(standard quantity - actual quantity) X standard price] |
| profit center | Business unit that has control over both costs and revenues and is therefore evaluated on the profit outcomes |
| responsibility center | The part of an organization under the control of a manager |
| return on investment | ROI: A model consisting of a margin component (Operating Income/Sales) and turnover component (Sales/Average Assets); reduces to Operating Income/Average Assets |
| standard cost | A measure of what costs should be incurred to achieve the observed output |
| traceable fixed costs | Fixed costs that would not exist if the unit under evaluation ceased to exist |
| variable overhead efficiency variance | A variance that reflects the level of efficiency associated with the application of variable overhead to production |
| variable overhead spending variance | A variance that reflects the difference between actual variable overhead and standard variable overhead associated with the actual units of the application base |